TIDMTLI
RNS Number : 4747P
Alternative Asset Opps PCC Ltd
02 October 2013
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Annual Financial Report Announcement
For the year ended 30 June 2013
The Directors announce the Annual Financial Report for the year
ended 30 June 2013.
The Company has today, in accordance with DTR 6.3.5, submitted
its Annual Financial Report for the year ended 30 June 2013 to the
National Storage Mechanism and it will shortly be available for
inspection at http://www.hemscott.com/nsm.do. The Annual Financial
Report is available to be viewed on or downloaded from the
Company's website at www.allianzgi.co.uk/TLI .
The financial information set out in this announcement does not
constitute the Company's statutory accounts for the year ended 30
June 2013, but is derived from those accounts. Statutory accounts
for the year ended 30 June 2013 will be delivered to Shareholders
during September 2013. The auditors have reported on the accounts
and their report was unqualified. The audit report draws attention
to the inherent uncertainty in the valuation of the Company's
Traded Life Interests.
The financial statements have been prepared in accordance with
International Financial Reporting Standards. The Company will
publish full financial statements that comply with International
Financial Reporting Standards in September 2013. This announcement
has been prepared using accounting policies consistent with those
set out in the Company's annual report and financial statements for
the year ended 30 June 2013.
The Net Asset Value as at 31 August 2013 is expected to be
released in a separate announcement shortly.
The Annual General Meeting of the Company will be held on 13
November 2013.
Peter Ingram
Company Secretary
Telephone number: 020 7065 1467
Melissa Gallagher
Head of Investment Trusts, Allianz Global Investors
Telephone number: 020 7065 1539
1 October 2013
155 Bishopsgate
London
EC2M 3AD
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Investor Information
For the year ended 30 June 2013
General information
Alternative Asset Opportunities PCC Limited (the "Company") was
registered on 27 February 2004 in Guernsey, as a closed-ended
protected cell company in accordance with the provisions of The
Companies (Guernsey) Law, 1994, and subsequently re-registered
under the provisions of The Companies (Guernsey) Law, 2008, as
amended. It was established with one Cell known as the US Traded
Life Interests Fund (the "Fund") which had a planned life of
approximately 8 years from the date of launch. The Company is
regulated by the Guernsey Financial Services Commission as an
authorised fund under the Protection of Investors (Bailiwick of
Guernsey) Law, 2008, as amended.
Following a Special Resolution passed at an Extraordinary
General Meeting on 28 August 2009, the Articles of Incorporation
were amended to move from having a fixed life in respect of the
Company's Cell, US Traded Life Interests Fund (terminating on 31
March 2012), to offering shareholders annual continuation votes
from the Company's 2012 Annual General Meeting onward.
With effect from 1 September 2009, the Company has been managed
with a view to being approved as an Investment Trust within the
meaning of the Corporation Tax Act 2010, and has been resident in
the UK for tax purposes from that date.
The Company's redeemable participating preference shares (the
"Shares") were admitted to the Official List of the UK Listing
Authority and commenced trading on the London Stock Exchange on 25
March 2004.
Investment objective
The Company's objective in respect of the Fund is to provide
investors with an attractive capital return through investment
predominantly in a diversified portfolio of US Traded Life
Interests ("TLIs").
Investment policy and strategy
The Company has invested the assets of the Fund in a range of
TLIs on the lives of US citizens aged, at the time of acquisition,
between 78 and 92 years. All TLIs acquired are Whole-Of-Life
policies or Universal Life policies. No viatical policies (that is,
a policy on the life of an insured who is terminally ill and with a
life expectancy of less than 2 years) have been acquired.
The TLIs acquired are policies issued by a range of US life
insurance companies. Each underlying life insurance company had an
A.M. Best or a Standard & Poor's credit rating of at least "A"
at the time of acquisition of the relevant policy. Page 32
discloses the current ratings against the Company's exposure based
on year-end valuation. A.M. Best is a US credit rating agency which
provides the most comprehensive coverage of the US life company
sector. Not more than 15 per cent. of the gross assets of the Fund,
at the time of purchase, have been invested in life policies issued
by any single US life insurance company or group.
The Board has overall responsibility for the assets of the Fund,
in accordance with the investment objective and policy, and subject
to advice received from the Investment Manager. At present there is
no intention to acquire further policies, but sales of policies may
occasionally be made when appropriate. The Company has the ability
to incur borrowings to be applied in meeting TLI acquisition costs,
premium payments and expenses. The Company's borrowings as at 30
June 2013 were US$5.9 million (GBP3.9 million (2012: US$29.2
million (GBP18.6 million)). The terms of these borrowings may
require the Company to utilise the net proceeds of maturing TLIs to
repay borrowings, but, subject to any such covenants, the Company
may return capital to shareholders either by means of the purchase
of shares in the market as authorised by shareholders resolution or
by return of capital in accordance with the Articles.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Investor Information (continued)
For the year ended 30 June 2013
Pending the return of capital to shareholders, the cash proceeds
of TLIs may be invested in a portfolio that may include US treasury
bonds, UK gilts and sterling-denominated corporate bonds with a
minimum rating of AA by Standard & Poor's or an equivalent
rating by another rating agency.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Investor Information (continued)
For the year ended 30 June 2013
Directors Registrar
CPG Tracy (Chairman) Capita Registrars (Guernsey)
Limited
DIW Reynolds (Chairman of the Mont Crevelt House,
Audit Committee) Bulwer Avenue
JPHS Scott St Sampson
SM Zein (resigned 20 February Guernsey GY2 4LH
2013)
TJ Emmott (appointed 20 February
2013)
Registered Office Investment Manager
Dorey Court SL Investment Management Limited
Admiral Park 8/11 Grosvenor Court
St Peter Port Foregate Street
Guernsey GY1 2HT Chester CH1 1HG
Manager Banker (UK)
RCM (UK) Limited Allied Irish Banks
155 Bishopsgate St Helen's
London 1 Undershaft
EC2M 3AD London EC3A 8AB
Secretary Banker (Guernsey)
RCM (UK) Limited Kleinwort Benson (Channel Islands)
Limited
155 Bishopsgate Dorey Court, Admiral Park
London EC2M 3AD St Peter Port
Represented by PWI Ingram FCIS Guernsey GY1 2HT
Administrator Custodian
Kleinwort Benson (Channel Islands) Kleinwort Benson (Guernsey)
Limited
Fund Services Limited Dorey Court, Admiral Park
Dorey Court, Admiral Park St Peter Port
St Peter Port Guernsey GY1 2HT
Guernsey GY1 2HT
Legal Advisers (UK) Sub Custodian
Herbert Smith Freehills LLP Wells Fargo Bank Northwest
N.A.
Exchange House 260 North Charles Lindbergh
Drive
Primrose Street Salt Lake City
London EC2A 2HS UT 84116
Legal Advisers (Guernsey) Financial Adviser and Corporate
Broker
Carey Olsen Westhouse Securities Limited
PO Box 98 Heron Tower
Carey House, Les Banques 110 Bishopsgate
St Peter Port London EC2N 4AY
Guernsey GY1 4BZ
Recognised Auditor
Deloitte LLP
Regency Court
Glategny Esplanade
St Peter Port
Guernsey GY1 3HW
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Investor Information (continued)
For the year ended 30 June 2013
Directors
The Directors have been chosen for their investment and
commercial experience and are listed below:
Charles Tracy, Chairman, (aged 67) has over 30 years' experience
as a merchant banker, covering both the investment management and
banking fields. On joining N.M. Rothschild & Sons in 1975 he
was made responsible for Asian and commodity-related investments,
working in Malaysia and Hong Kong before taking up the post of
Managing Director of N.M. Rothschild & Sons (C.I.) Ltd. in
1981, and remaining in that position until 1998. During that period
he was Chairman of the Association of Guernsey Banks and of the
Guernsey International Business Association. He is currently
non-executive Chairman of Louvre Fund Services Limited and Chairman
of the Board of the Guernsey Banking Deposit Compensation Scheme.
He is a resident of Guernsey.
Ian Reynolds (aged 70) is a former Chief Executive of Commercial
Union Life Assurance Company and a former director of Liverpool
Victoria Friendly Society. He is a director of The Equitable Life
Assurance Society, and a former consultant actuary at Towers
Perrin. Mr Reynolds is a Fellow of the Institute of Actuaries and a
Chartered Director. He is UK resident.
John Scott (aged 61) is currently a director of several UK
investment trusts and is Chairman of Scottish Mortgage Investment
Trust PLC. Mr Scott held a number of senior appointments at Lazard
Brothers & Co., Limited between 1981 and 2001. Prior to that,
he worked at Jardine Matheson & Co., Limited. He is a Fellow of
the Chartered Insurance Institute and of the Chartered Institute
for Securities and Investment. He is UK resident.
Tim Emmott (aged 60) was appointed a Director on 20 February
2013. He has over 35 years' experience in banking and investment in
a variety of analytical, trading and management roles. He has been
involved in investing in distressed, illiquid and alternative
financial assets for the past 20 years and is currently a director
of Economic Lifestyle Property Investment Company Limited, a fund
listed on the Channel Islands Stock Exchange. He is UK
resident.
The Investment Manager
The Investment Manager, SL Investment Management Limited, which
is authorised and regulated in the United Kingdom by the Financial
Conduct Authority, was incorporated in 1990 and is an Investment
Manager for a range of specialist investment products.
The Manager
RCM (UK) Limited, which is authorised and regulated in the
United Kingdom by the Financial Conduct Authority, is manager of a
number of closed-ended investment companies with approximately
GBP1.1 billion of such assets under management in a range of
investment companies and investment trusts as at 30 June 2013. The
Manager is responsible for managing the cash and fixed interest
holdings of the Fund and foreign currency hedging.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Financial Highlights
For the period from 1 July 2012 to 30 June 2013
At 30 At 30
June 2013 June 2012
Shares in
issue 72,000,000 40,000,000
Net assets attributable to shareholders GBP34,907,478 GBP32,468,299
Net asset value per Share 48.5p* 81.2p
Mid market share price 45.5p 47.3p
Total (deficit)/surplus on ordinary activities
for the financial year per Share (12.02p) 4.00p
Revenue deficit per
Share (1.86p) (2.89p)
Dividends
The Directors do not propose a dividend for the year ended 30
June 2013 (2012: nil).
* The decrease of the net asset value per Share in the current
year to 30 June 2013 partly reflects the issue of 32,000,000 Shares
at 32p per Share through a Placing and Open Offer. Note also
comments on valuation policy in the Chairman's Statement
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Chairman's Statement
For the year ended 30 June 2013
Introduction
The twelve months to 30 June 2013 has been a year of substantial
development for your Company, with a successful Placing and Open
Offer resulting in borrowings being significantly reduced; at the
time of writing the Company is in net cash surplus. The number of
policy maturities was at the same level as in recent years, but the
policies maturing during our financial year were relatively small
in size, resulting in a net negative cash flow. Since the year end,
however, one large maturity has made a significant difference to
the cash position. A further three maturities have been identified
but not yet formally certified. Nonetheless, the overall level of
maturities since inception has been more than 50% lower than
originally anticipated.
I draw your attention to the section headed 'Valuation' below. A
significant change in the Company's valuation policy has now been
introduced, backdated to 30 June 2013. The effect is a reduction in
the published NAV per share as at that date from 55.6p to 48.5p, a
fall of 12.8%. In simple terms, the Board has taken a more
conservative view on the life expectancy figures provided by
independent assessors.
The Company's functional and reporting currency is Sterling,
however, because the TLI portfolio and the Company's borrowings are
denominated in US Dollars, some of the reporting below is given in
US Dollars. The GBP/US$ exchange rate as at 30 June 2013 used for
these accounts was 1.5167.
Portfolio developments
A summary of portfolio maturities since inception is given in
the following table:
Period 66 months 10 months 12 months 12 months 12 months
------------------------ ----------- ----------- ----------- ----------- -----------
Dates Inception 1/9/09 1/7/10 1/7/11 1/7/12
- 30/6/09 - 30/6/10 - 30/6/11 - 30/6/12 - 30/6/13
------------------------ ----------- ----------- ----------- ----------- -----------
Number of policies
matured 20 4 6 8 7
------------------------ ----------- ----------- ----------- ----------- -----------
Face value of policies
matured ($ million) $27.6m $10.6m $13.0m $16.9m $5.7m
------------------------ ----------- ----------- ----------- ----------- -----------
Premiums paid ($
million) $38.3m $7.3m $8.0m $8.4m $8.2m
------------------------ ----------- ----------- ----------- ----------- -----------
During the year to 30 June 2013, 7 policy maturities were
identified, with a total face value of US$ 5.7 million. This
compares with 8 policies with a face value of US$16.9 million in
the year to 30 June 2012, and 30 policies with a face value of
US$51.2 million in the period from the Company's launch to 30 June
2011. Unlike the preceding year, maturity proceeds did not exceed
cash outflows for premiums, although a large maturity was
identified post year end, as noted below.
The realised gains on maturing policies amounted to
approximately US$2.3 million in the year, or 2.1p per share. Unlike
last year, when the effect of gains on maturities outweighed the
premiums paid, policy re-valuations and overheads, the overall
result for the year was a reduction in net assets per share of
12.02p, compared to a gain of 4.00p in the previous year.
Four further maturities, relating to four lives assured, have
been identified after the year end. Cash proceeds for the first
maturity (US$5.0 million) were received in August 2013. The three
other maturities with a combined face value of US$1.8million have
not yet been formally certified.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Chairman's Statement (continued)
For the year ended 30 June 2013
Portfolio developments (continued)
As at 30 June 2013 there were a total of 102 policies in the
portfolio, with a face value of US$159.9 million and a valuation of
US$56.0 million. There have been no policy acquisitions since
completion of the original policy purchase programme, but premiums
continue to be paid on policies in force, amounting to US$8.2
million during the year, and assuming no maturities, would amount
to US$8.7 million for the year to 30 June 2014.
On 5 October 2012 the Board announced proposals to raise up to
GBP10.2 million through the issue of up to 32,000,000 new shares at
an Issue Price of 32 pence per share through a Placing and Open
Offer on the basis of 4 new shares for every 5 existing shares. The
renewal of the Company's loan facility with Allied Irish Banks
("AIB") was conditional upon raising at least US$10 million under
the Placing and Open Offer. This issue was successful, with the
full number of shares being taken up, and raised a net total of
GBP9.7 million.
Gearing
The Board's policy has been to pay down borrowings whenever
possible; to date, our loan covenants have provided us with no
alternative to this. During the year the Company's total borrowings
decreased from US$29,210,000 to US$5,939,000. This reflected policy
maturity receipts totalling US$17,670,000, including US$12,020,000
relating to policies maturing in the previous financial year, and
the net proceeds of the Placing and Open Offer referred to above,
equivalent to US$15,601,000.
On 30 October 2012, the Company renewed its loan agreement with
AIB. This will provide the necessary financing for the period to 31
March 2014. Ongoing discussions continue with regards to the
Company's future financing requirements and, given the current high
level of loan cover, the Board will be seeking more flexible
arrangements at renewal.
Valuation
The current Net Asset Value as released to the market is a
Directors' valuation, prepared with the assistance of the
Investment Manager, which uses estimates of life expectancy to
arrive at a table of cash flows, based on actuarial principles
discounted to present value using a discount rate (or internal rate
of return, IRR). The key factors in the valuation are therefore:
the policy face value and the premiums payable; the assumed life
expectancy (LE) of the insured; the actuarial mortality table; and
the discount rate.
The Board has previously advised that it was reconsidering
policy valuations and anticipated a reduction in published NAV per
share as a result. Having now obtained a number of new LEs on a
significant number of lives, representing more than 40% of the
portfolio by face value, the Board, after seeking advice from the
Manager and the Investment Manager, has now reached a conclusion on
a new approach.
Up to the end of 2012, the Board obtained the majority of its LE
estimates from two major providers. Although past experience is
that they have tended to underestimate LEs, both have recently made
alterations to their underwriting methodology to address these
issues, and the Board was therefore keen to establish what, if any,
effect these changes might have on the LEs previously provided. So
it commenced a programme of re-assessment of LEs, involving 38
policies with a face value of well over half the total portfolio,
and a total of 34 lives. So far, 29 of these policies have been
fully re-assessed.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Chairman's Statement (continued)
For the year ended 30 June 2013
Valuation (continued)
The Board was pleasantly surprised to note that the result of
this exercise so far, if applied across the whole portfolio, would
be to reduce portfolio LEs by approximately 1 month and increase
valuations by around 1%. The Board has, however, become aware that
third party evidence suggests that these providers continue to
underestimate LEs, and this seems to correspond to the Company's
experience to date. LE estimates were therefore obtained, starting
in April 2013, from a third provider, whose LE estimates typically
are longer than those of other industry participants. As expected,
their estimates for the policies assessed so far were indeed
significantly longer (by an average of 24 months compared to the
average from the original two LE providers).
Weighing this information up, the Board decided that it was
appropriate to adopt the average of the three providers' estimates,
which take account not only of the most recent LE calculation
methodologies but also of changes in the medical status of the
insured lives. The use of a third LE provider introduces a more
conservative element into the valuation process, although it should
be noted that the majority of market participants have tended to
use just the original two providers when trading policies. This new
approach left two issues to be decided.
The first related to the valuation of those policies which have
not recently (that is to say since 1 April 2013) had a new LE
estimate. The Board could, of course, have continued its policy of
using simply the last obtained LE estimate regardless of recency
and providing projections for shareholders of the hypothetical
effect of changes in LE for the remaining policies on the NAV. The
Board has, however, decided that there is good enough evidence that
it should use more conservative (i.e. longer) LEs, and that it
cannot ignore the outcome of the figures obtained so far based on
three providers. So far, 29 policies with a face value amounting to
over 40% of the portfolio have been re-assessed. The average change
in LE is an increase of approximately 12%.
The Board's new policy is therefore to apply this average change
to the remainder of the portfolio (with suitable adjustments for
the dates of the LEs actually obtained) which results in the
following changes in published NAV:
Original Revised Change
30 June 2013 55.6p 48.5p -12.8%
31 July 2013 56.8p 50.1p -11.8%
This change in policy has been adopted with retrospective effect
for the accounts for the last financial year to 30 June 2013 and
will be reflected in future NAV announce-ments.
The second issue is the choice of IRR used for valuation
purposes. The Board has explained its use of a 12% IRR in previous
communications. There have been few trades in policies which match
the Company's portfolio, but the Board notes that some recent
trades by other vendors appear to have been taking place at higher
IRRs. Given that the market typically has tended to use the
original two LE providers historically used by the Company in
arriving at a price for a TLI policy, we consider that it would be
a form of double counting both to adopt a more conservative LE
policy as above and to use higher IRRs. If the Board were to keep
to its old dual provider approach but adopt, say, a 14% IRR the
effect on valuation would be reduction in NAV of about 6%. It has,
however, decided to retain the 12% IRR assumption, which reflects
the fact that the portfolio is held for the long term. The new
policy will be more conservative than simply adopting a higher IRR,
which is one of the options the Board did consider.
In arriving at its decision the Board noted that there is
evidence of better demand for policies, as reported in the
Investment Managers Report, and that where more conservative LE
estimates are used market IRRs do indeed appear to be lower on
average.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Chairman's Statement (continued)
For the year ended 30 June 2013
Valuation (continued)
The Board will continue to re-assess LEs selectively on the
remaining lives. It should be noted that new LEs will not be
obtained on a number of the remaining lives; in some cases medical
information has proved impossible to obtain and in others the
essentially fixed cost of obtaining a new LE cannot be justified in
view of the relatively small value of the policy concerned.
To date the mortality rate in the portfolio (i.e. the ratio of
actual deaths to expected deaths) has been below 50%. This mainly
reflects the fact that LE assessments have typically been too
short. Recent changes reflect more up to date medical information
and a much more conservative approach to LE assessment, so that, as
shown below, the average LE is now very close to that predicted by
standard mortality tables. The Board feels that this new approach
to valuations gives a fair estimate of market value and is based on
as good an estimate of LEs in this context as can be obtained from
third party sources.
Past mortality is not, of course, a guide to future outcomes,
especially as the LE basis has been changed, but if a continuing
50% mortality rate were to be assumed with an unchanged discount
rate, the net asset value per share as at 30 June 2013 would have
been 20.6p per share. This figure is provided to give shareholders
a measure of the effect on the portfolio of low mortality rates,
but it is an illustration only; in practice the high discount rate
used in valuations at least partially allows for uncertainty in
this respect.
As ever, the return on investments will depend on actual
mortality outcomes, not on projected valuations, and the Board
continues to believe that shareholders' interests are best served
by holding policies to maturity.
The tables below aim to give investors an appreciation of the
effects on valuation of differing assumptions to both LE and
IRR.
- The first line of NAVs in the table uses the 'Latest LE'
assumption, that is to say either an LE based on a recently updated
assessment (obtained on or after 1 April 2013), or for the
remaining policies an adjusted LE based on the most recent LE
obtained, increased by 12%. The average LE (weighted by policy
value), is shown for reference (5.0 years). NAV is then shown at
four different discount rates, ranging from 10% to 20%. This shows
the effect of IRR on current value, and it also allows investors to
assess the effects of policy sales if, for example, the portfolio
was to be liquidated.
- The second line shows the effect of a further increase of one year in the valuation LEs.
- The third line shows the effect of a decrease of one year in the valuation LEs.
- Finally, the fourth line shows the outcome of assuming LEs are
simply based on the current table of life expectancies for the
general population, the 2008 Valuation Basic Table, i.e. ignoring
LE assessments. This shows that portfolio LEs are now very much in
line with the general population, giving some reassurance that the
LEs are no longer subject to exceptional factors.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Chairman's Statement (continued)
For the year ended 30 June 2013
Sensitivity Matrix
Net Asset Value in pence per share on various assumptions as at
30 June 2013:
Mortality Average Discount Rates applied to cash flows
Assumptions LE (years)
-------------- ------------ -------------------------------------------
Current
10% (12%) 16% 20%
-------------- ------------ --------- ------------ -------- --------
Latest LE 5.0 52.0 48.5 42.7 38.1
-------------- ------------ --------- ------------ -------- --------
+1 year
for all
LEs 6.0 37.7 34.6 29.6 25.7
-------------- ------------ --------- ------------ -------- --------
-1 year
for all
LEs 4.0 67.8 64.1 57.8 52.6
-------------- ------------ --------- ------------ -------- --------
Using 2008
VBT 5.1 51.4 47.7 41.7 36.9
-------------- ------------ --------- ------------ -------- --------
Credit Risk
There have been no major changes in the financial standing of
the insurers who have issued the policies in the portfolio. As at
the year end 94.9% of the Company's policies by value were issued
by companies with an A.M. Best rating of 'A' or better, with the
remaining 5.1% rated A-. This figure has not changed significantly
for some time.
Hedging
The Company's original Investment Policy stated that it was the
intention to hedge the US dollar exposure. Following the removal of
this statement as part of the changes to the policy adopted in
September 2011, the Company's outstanding foreign exchange
positions were closed out.
From 30 March 2012, the Company has operated on an unhedged
basis, and there is no current intention to initiate any further
currency hedges.
During the year, the GBP/US$ exchange rate weakened from 1.56845
as at 30 June 2012 to 1.5167 as at 30 June 2013. As the bulk of the
portfolio assets are denominated in US$, this resulted in a net
gain for the portfolio of 3.3% or approximately 1.8p per share.
Other issues
The Board has considered the potential impact of the EU
Directive on Alternative Investment Fund Managers ("AIFMD") and
also the Foreign Account Tax Compliance Act ("FATCA"). Based on
legal advice received it is believed that the Company does not fall
within the scope of the AIFMD. On 31 May 2013 HM Revenue &
Customs published final Guidance Notes on the implementation of
FATCA, which confirmed that collective investment vehicles, such as
AAO, will not be regarded as a Reporting Financial Institution for
the purposes of FATCA.
The notes to the accounts report a technical change in the
Manager of the Company, following corporate reorganisation within
the Allianz Group, and a small reduction in the percentage
management fee, as the Company is expected to require less input
from the Manager. This is a good moment to acknowledge the
considerable contribution made by all the staff at RCM UK over the
last few years, and particularly that of Rupert Marlow, who retired
during the year. His wise counsel has been greatly appreciated. The
Board would also like to thank SL Investment Management for their
support, particularly during the last year when a number of factors
have required them to provide additional in-depth actuarial
analysis.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Chairman's Statement (continued)
For the year ended 30 June 2013
Outlook
The market for TLIs continues to show signs of increased
activity, with a number of new investors entering the market during
the year. Future investment performance of the Company will
primarily be driven by the timing and frequency of mortalities in
the portfolio. However, the Board will continue to monitor market
activity and consider policy sales should favourable opportunities
arise.
The Company is now in a much more robust position than it was a
year ago, being less exposed to gearing risk. If mortalities
continue as predicted, returning funds to shareholders either
directly or by buying back shares in the market may become a
realistic possibility, subject to banking covenants. The agenda for
the Annual General Meeting contains two significant items of
Special Business: a vote to continue the Company and a vote to
renew the Board's power to buy back shares in the market for a
further year. I commend both of them to shareholders; holding
policies to maturity should produce a better return than early
sales and the purchase of shares is one constructive way in which
the Board can begin to return capital to investors.
Charles Tracy
Chairman
1 October 2013
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Investment Manager's Review
For the year ended 30 June 2013
Portfolio Overview
During the twelve month period from 1 July 2012 to 30 June 2013
there were seven confirmed policy maturities with a total face
amount of $5.7m. The seven maturities related to five individual
lives, all of which were male. As of 30 June 2013, 102 policies
remained within the fund's portfolio with exposure to 90 individual
lives.
Cumulatively, as of 30 June 2013 there have been 45 policy
maturities across 37 lives since inception. Proceeds received from
all maturities totals $74.6m, realising a $34.3m gain. Thirteen
policies have been sold since inception of the Company, generating
proceeds of $11.2m (realising a $3.9m loss). No policies were sold
during the reporting period.
Four further maturities (two males, and two females) have been
identified since the year end. The first maturity with a death
benefit of $5.0m has been formally certified. The gain was
recognised in the July 2013 Net Asset Valuation and the cash
proceeds were received in August 2013. The three other maturities,
with a combined death benefit of $1.8m, have not yet been formally
certified.
Portfolio Summary
Face Value $159.9m
---------------------------------------- --------------
Total number of Holding Life Companies 27
---------------------------------------- --------------
Face Weighted Averages
---------------------------------------- --------------
Male/Female Ratio at purchase 65.8% / 34.2%
---------------------------------------- --------------
Age at purchase 81.7 years
---------------------------------------- --------------
LE at purchase 8.0 years
---------------------------------------- --------------
Current Male/Female Ratio 64.5% / 35.5%
---------------------------------------- --------------
Current Age 89.6 years
---------------------------------------- --------------
Current LE 5.1 years
---------------------------------------- --------------
Life Group (Parent Company) Distribution (Top 5)
Ranking by Valuation % Parent Company % Total Face Value % Total Valuation
----------------------- ---------------------------------------- ------------------- ------------------
1 American International Group, Inc 21.6% 23.7%
----------------------- ---------------------------------------- ------------------- ------------------
2 Lincoln National Corporation 19.7% 18.1%
----------------------- ---------------------------------------- ------------------- ------------------
3 AEGON N.V. 14.4% 15.0%
----------------------- ---------------------------------------- ------------------- ------------------
4 Massachusetts Mutual Life Insurance Co 5.4% 7.1%
----------------------- ---------------------------------------- ------------------- ------------------
5 ING Groep N.V. 4.2% 5.8%
----------------------- ---------------------------------------- ------------------- ------------------
Credit Quality Distribution by Holding Life Company
AM Best Rating % Total Face Value % Total Valuation
--------------------------- ------------------- ------------------
A++ 9.5% 11.0%
--------------------------- ------------------- ------------------
A+ 56.9% 50.9%
--------------------------- ------------------- ------------------
A 28.3% 33.0%
--------------------------- ------------------- ------------------
A- 5.3% 5.1%
--------------------------- ------------------- ------------------
Total 100% 100%
--------------------------- ------------------- ------------------
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Investment Manager's Review (continued)
For the year ended 30 June 2013
Distribution of Life Expectancy Estimates
The following table shows the distribution by death benefit of
the policies in the portfolio by LE band. Policies are grouped by 6
month LE bands and the table shows the number of lives and the
total death benefit in each group. The LEs are the valuation LEs
used for the 30 June 2013 valuation.
It is important to note that the LE is an average of the
estimated length of future lifetime for an individual with a given
age and health status. The table is not therefore a prediction of
when actual maturities will occur and is thus not a cash flow
forecast.
LE bands
(years)
-------------------------------------- ------------- -----------------
Total Face Value
From Up to No. of Lives US$000
----------------- ------------------- ------------- -----------------
0 1.5 0 -
----------------- ------------------- ------------- -----------------
1.5 2 1 1,300
----------------- ------------------- ------------- -----------------
2 2.5 1 400
----------------- ------------------- ------------- -----------------
2.5 3 4 7,915
----------------- ------------------- ------------- -----------------
3 3.5 5 11,450
----------------- ------------------- ------------- -----------------
3.5 4 10 18,016
----------------- ------------------- ------------- -----------------
4 4.5 14 25,977
----------------- ------------------- ------------- -----------------
4.5 5 8 7,607
----------------- ------------------- ------------- -----------------
5 5.5 12 23,350
----------------- ------------------- ------------- -----------------
5.5 6 11 16,344
----------------- ------------------- ------------- -----------------
6 6.5 8 13,902
----------------- ------------------- ------------- -----------------
6.5 7 10 19,151
----------------- ------------------- ------------- -----------------
7 7.5 1 6,000
----------------- ------------------- ------------- -----------------
7.5 8 3 5,500
----------------- ------------------- ------------- -----------------
8+ 2 3,000
----------------- ------------------- ------------- -----------------
Total 90 159,913
----------------- ------------------- ------------- -----------------
Premium Payments
Premiums remain the largest draw on the Company's cash. As a
result, it is important that premium streams are optimised such
that AAO pays the minimum premium required to meet the cost of
insurance required by the life company. SL Investment Management
continues the ongoing review of all policy statements to identify
any scope for further optimisation of the premium payment
schedules. Without further maturities, the expected cost of
premiums for the twelve months to 30 June 2014 would be
approximately $8.7m.
Policy Expiry Date Analysis
Written into the contract for some policies is an expiry date (a
'term out' date), after which no more premiums will be accepted by
the life office and the death benefit will no longer be payable
upon death.
Where applicable, this usually coincides with the policy
anniversary closest to the insured's 100th birthday. There are 49
such policies in the portfolio.
There are 8 policies with extension options to age 115 or 120,
and 3 policies with 'partial' extensions - whereby the policy term
is extended until death, but on a reduced death benefit after age
100.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Investment Manager's Review (continued)
For the year ended 30 June 2013
Policy Expiry Date Analysis (continued)
A summary of the policies in the portfolio as at 30 June 2013 is
as follows:
Policies Face amount %Face
(US$'000) 30 June 2013 valuation (US$'000) % Valuation
------------------------------------ --------- ------------ ------ --------------------------------- ------------
No extension 49 70,116 43.8% 24,691 44.1%
------------------------------------ --------- ------------ ------ --------------------------------- ------------
Extensions to age 115/120 8 10,700 6.7% 2,974 5.3%
------------------------------------ --------- ------------ ------ --------------------------------- ------------
Extension to death with reduced
death benefit after age 100 3 6,500 4.1% 2,876 5.1%
------------------------------------ --------- ------------ ------ --------------------------------- ------------
No Expiry date 42 72,597 45.4% 25,482 45.5%
------------------------------------ --------- ------------ ------ --------------------------------- ------------
Total 102 159,913 100% 56,023 100%
------------------------------------ --------- ------------ ------ --------------------------------- ------------
Period Review and Outlook
This reporting period witnessed a lower volume of maturities
compared with the previous twelve months. This highlights a feature
of this asset class; that the timing of mortalities is inherently
unpredictable. It should be noted that short term performance is
driven not just by the frequency of maturities, but also the size
of the policy maturities.
The average face value of the policies in the portfolio is
$1.6m, but there is considerable variation in the size of
individual face amounts. The table below illustrates the
distribution of the 90 lives in the portfolio by face value as at
30 June 2013. Where a life insured represents more than one policy
in the portfolio, the life is categorised according to the total
face amount relating to that life:
Policy bands No. Total Face Total Valuation % of valuation
(face value) of lives Value US$000
US$000
---------------- ---------- ----------- ---------------- ---------------
From Up to
------- ------- ---------- ----------- ---------------- ---------------
$0m $0.5m 14 4,889 1,898 3.4
------- ------- ---------- ----------- ---------------- ---------------
$0.5m $1m 17 10,244 3,368 6.0
------- ------- ---------- ----------- ---------------- ---------------
$1m $2.5m 36 51,888 17,559 31.3
------- ------- ---------- ----------- ---------------- ---------------
$2.5m $5m 13 41,151 14,189 25.3
------- ------- ---------- ----------- ---------------- ---------------
$5m $6.0m 10 51,741 19,009 34.0
------- ------- ---------- ----------- ---------------- ---------------
Total 90 159,913 56,023 100.0
---------------- ---------- ----------- ---------------- ---------------
It can be seen that a significant proportion of the total death
benefit is represented by a relatively small proportion of lives.
23 lives (26% of total lives) accounts for 58% of the total face
value and 59% of the reported valuation.
Life expectancy (LE) assessments remain a key focus for the
industry. In January 2013 one of the major LE assessment companies,
21st Services, announced adjustments to its mortality tables citing
advances in its underwriting methodology. 21st Services stated that
the adjustments resulted in an extension to its LE estimates of 19%
on average. 21st Services explained that the extensions were, in
part, due to a change in the way insured lifestyle was taken into
account, with more active insured's living longer even when
suffering from serious health problems.
The other two major LE underwriters did not adjust their LEs
following the 21st Services announcement. Shortly after the
announcement, both companies stated that they had no plans to
adjust their life expectancy estimates in the near future.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Investment Manager's Review (continued)
For the year ended 30 June 2013
Period Review and Outlook (continued)
Historically, the market has tended to favour LE assessments
from 21st Services and AVS. However, industry reports show that LEs
from Fasano are usually longer, i.e. more conservative. With this
in mind, the Board has recently initiated a programme of LE
updating for policies representing over $90m in face value (56% of
the portfolio). LE assessments from all three major underwriters
have been obtained.
In recent months, there have been strong signs of investment
capital starting to return to the traded life market, with
investors citing lack of policy supply as their primary concern. It
remains to be seen whether demand for policies will reach pre 2008
levels, or whether sustained demand will persuade brokers/suppliers
to increase their marketing efforts to stimulate policy supply from
US seniors. However, if demand continues to outweigh supply over
the longer term, market IRRs are likely to fall and prices increase
as a result.
It is likely that the buy and hold investment strategy adopted
by the Company will remain optimal. However, market conditions will
continue to be monitored closely to identify any favourable sales
opportunities, should they arise.
With an average life insured age of nearly 90 years and an
average life expectancy of five years, the Company holds a
well-seasoned portfolio. The total death benefit of the policies
held in the portfolio is $159.9m versus a prevailing valuation of
$56.0m. The potential for investment gains over the next few years
is therefore evident, although against this must be set the
continuing obligation to pay premiums, which means that the later a
policy matures, the higher its book cost. The magnitude and timing
of gains will ultimately depend on the mortality experience
realised over the coming years.
SL Investment Management
1 October 2013
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Manager's Review
For the year ended 30 June 2013
Borrowings and investments
As of 30 June 2013, the Company had drawn down US$5.9 million of
the US$15 million available for drawing down under the existing
facility provided by AIB. This facility expires on 31 March 2014
and the further US$9.1 million available should provide the Company
with enough cash to meet its obligations until then. It is expected
that discussions with AIB as to the renewal of the facility beyond
31 March 2014 will start later this year.
The actual loan balance as of 30 June 2013 was US$5,939,000
compared with US$29,210,000 as of 30 June 2012. During the year,
the Company drew down a total of US$10 million but repaid
US$17,670,000 as a result of policy maturities and US$15,601,000 as
a result of the share issue in November. Since the year end, a
further US$2,000,000 has been drawn down and a further US$7,000,000
has been repaid.
The Company has sold its GBP100,000 holding of UK Treasury 4%
2016, as the Company no longer needs to generate securities income
in order to qualify as an Investment Trust Company for tax
purposes.
US dollar exposure
The Company no longer hedges its US dollar exposure, so the
Company is fully exposed to the effect of exchange rates upon its
net US dollar positions.
Change of Manager
Later this year RCM (UK) Limited ("RCM") will be succeeded as
manager of the Fund (the "Manager") and as company secretary of the
Fund (the "Company Secretary") by Allianz Global Investors Europe
GmbH, acting by its UK branch ("AllianzGI Europe"). It is
anticipated that the change of Manager and Company Secretary will
become effective on or about 31 October 2013.
RCM and AllianzGI Europe are both wholly owned subsidiaries of
Allianz Global Investors GmbH, a financial holding company
supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht
("BaFin"), and incorporated under the laws of Germany.
It is planned to merge RCM into AllianzGI Europe during the
fourth quarter of 2013. The merger will take place pursuant to the
European Cross-Border Merger Directive 2005/56/EC, as implemented
in the UK and Germany. RCM will cease to exist as a separate
corporate entity but its activities will generally continue as part
of AllianzGI Europe's UK branch. On the basis that RCM will merge
into and, as a matter of law, be succeeded as a legal entity by
AllianzGI Europe, in a technical sense no "change" of Manager and
of Company Secretary will take place.
As a result of the merger, AllianzGI Europe will become the
Manager and the Company Secretary of the Fund and will succeed RCM
as a party to agreements that it has entered into in connection
with services that it provides to the Company including a
management agreement, an investment management agreement and an
administration and secretarial services agreement.
AllianzGI Europe's duties as the Manager and as the Company
Secretary will be performed out of its UK branch and the same
personnel will perform the relevant functions as they do
currently.
RCM (UK) Limited
1 October 2013
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Directors' Report
For the year ended 30 June 2013
The Directors have pleasure in submitting their Annual Financial
Report for the year ended 30 June 2013 with comparatives for the
year ended 30 June 2012.
Principal activities
The Company is a Guernsey registered closed-ended protected cell
company established with one cell known as the US Traded Life
Interests Fund (the "Fund"). The redeemable preference shares (the
"Shares") in the Company have been admitted to the Official List of
the UK Listing Authority with a premium listing and to trading on
the London Stock Exchange's main market for listed securities. The
Company's objective in respect of the Fund is to provide investors
with an attractive capital return through investment predominantly
in a diversified portfolio of US Traded Life Interests
("TLIs").
Revenue, capital and dividends
The Statement of Comprehensive Income set out on page 28 shows a
revenue deficit for the year amounting to GBP1,127,775 (2012:
revenue deficit for the year GBP1,156,807). There was a capital
deficit for the year amounting to GBP6,179,778 (2012: capital
surplus for the year GBP2,754,640). The Directors have not paid an
interim dividend (2012: nil) and do not propose the payment of a
final dividend for the year (2012: nil).
Assets
At the year end the net assets attributable to the Shares were
GBP34,907,478 (2012: GBP32,468,299). Based on this figure the net
asset value of a Share in the Fund was 48.5p (2012: 81.2p).
Share capital
During the year no Shares were repurchased. Following a Placing
and Open Offer 32,000,000 new Shares were issued on 5 November
2012.
Substantial shareholdings in the Fund
As at the date of this report, the following companies had
declared a notifiable interest in the Company's voting rights:
Shares held Percentage
held
%
Investec Asset Management
Limited 15,599,798 21.67
AIB 8,325,000 11.56
Reliance Mutual Society
Limited 4,320,000 6.00
Henderson Global Investors 3,600,000 5.00
Premier Fund Managers
Limited 3,590,000 4.99
Rathbone Brothers Plc 2,743,400 3.81
At the date of approval of this report, there has been no other
notifiable interest in the Company's voting rights reported to the
Company
Crest registration
Shareholders may hold Shares in either certificated or
uncertificated form.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Directors' Report (continued)
For the year ended 30 June 2013
Directors
The Directors serving on the Board during the year, together
with their beneficial interests and those of their families at 30
June 2013, were as follows:
Shares Shares
30 June 2013 30 June 2012
CPG Tracy (Chairman) - -
DIW Reynolds 59,600 42,000
SM Zein (resigned 20 February - -
2013)
JPHS Scott 157,854 87,697
TJ Emmott (appointed 20 935,000*(+) -
February 2013)
* At date of appointment; 235,000 shares are non-beneficial
interest
The Company has no formal service contracts with the
Directors.
There were no third party indemnities in respect of the
Directors for the current or prior period.
In accordance with the Articles of Incorporation the Director
retiring by rotation at the Annual General Meeting is Mr JPHS
Scott. Mr TJ Emmott, having been appointed a Director since the
date of the last Annual General Meeting, offers himself for
election as a Director.
The Board believes that Mr JPHS Scott, who has served for four
years, is committed to his role as a non-executive Director and
that his re-election would be in the interests of the Company. The
Board also believes that Mr TJ Emmott, who has served for less than
one year, is committed to his role as a non-executive Director and
that his election would be in the interests of the Company.
Corporate Governance
The UK Corporate Governance Code ("the Code") was revised and
published in September 2012 and applies to accounting periods
commencing on or after 1 October 2012. All companies with a Premium
Listing of equity shares, regardless of whether they are
incorporated in the UK or elsewhere (which includes the Company),
are required to "comply or explain" against the Code.
Throughout the year ended 30 June 2013 the Company has been in
compliance with the Main Principles of the UK Code, and has also
complied with the detailed provisions set out in Section 1 of the
UK Code, except as set out below.
The UK Code includes provisions relating to:
-- The role of chief executive
-- Executive remuneration, including the remuneration of executive directors
-- Appointment of a senior independent director
As permitted in the preamble to the UK Code, the Board considers
these provisions are not relevant to the position of the Company.
The Company is an externally managed investment company without
executive staff; a senior independent director has not been
appointed given that all Directors are independent of the Company
and the key service providers.
On 30 September 2011, the Guernsey Financial Services Commission
issued a new Code of Corporate Governance (the "Guernsey Code")
which came into effect on 1 January 2012.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Directors' Report (continued)
For the year ended 30 June 2013
Companies which report against the Code are deemed to meet
compliance with the Guernsey Code.
Statements of compliance
The Directors believe that the Company has complied throughout
the year with the Main Principles of the UK Code where appropriate,
and that it has also complied with the detailed provisions of the
UK Code, except in so far as they relate to the role of the chief
executive , the remuneration of executive staff and the appointment
of a senior independent director; it has explained the reasons for
non-compliance above. On that basis the Directors believe the
Company to be compliant with the requirements of the UK Listing
Authority Listing Rules as regards corporate governance.
By reporting against the UK Code as outlined above, the Company
is deemed to be compliant with the Guernsey Code.
The Board
The Board meets regularly, normally quarterly, and more
frequently if necessary, and retains full responsibility for the
direction and control of the Company.
The Company is overseen by a Board comprising four non-executive
Directors, all of whom have wide experience and are considered to
be independent. The Board believes that it is in the shareholders'
best interests for the Chairman to be the point of contact for all
matters relating to the governance of the Company and as such has
not appointed a Senior Independent Director for the purpose of the
Code.
The Directors have access to the advice and services of the
Company Secretary, who is responsible to the Board for ensuring
that the Board procedures are followed and that applicable rules
and regulations are complied with.
The appointment of Directors is considered by the Board which
carries out the functions of the Nominations Committee. One third,
or the number nearest to but not exceeding one third, of the
Directors must retire and offer themselves for re-appointment at
each subsequent Annual General Meeting.
On appointment, the Manager and the Company Secretary provide
all Directors with induction training.
The Board reviewed its performance and composition during the
year, and was satisfied on both counts. In addition, it is
considered that the performance of all Directors continues to be
effective and that they have demonstrated commitment to their
roles.
In order to review the effectiveness of the Board, the
Committees and the individual Directors, the Chairman carried out a
thorough appraisal process in 2013 in respect of the year under
review. The appraisal of the Chairman was carried out by the Board
as a whole under the leadership of DIW Reynolds.
The Board is responsible for establishing, maintaining and
monitoring the effectiveness of the Company's system of internal,
financial and other controls. The internal financial controls
operated by the Board include the authorisation of the investment
strategy and regular reviews of the financial results and
investment performance. The system of internal financial controls
can provide only reasonable and not absolute assurance against
material misstatement or loss.
The Board has contractually delegated to SL Investment
Management Limited the investment management of the Fund's
investments and to RCM (UK) Limited the management of the
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Directors' Report (continued)
For the year ended 30 June 2013
The Board (continued)
cash and foreign exchange elements. The safe custody of the
Fund's investments is managed by Kleinwort Benson (Guernsey)
Limited. Wells Fargo Bank in the USA acts as sub-custodian.
Kleinwort Benson (Channel Islands) Fund Services Limited are
contracted to provide the Company's administration and accounting
functions and Capita Registrars (Guernsey) Limited its registration
function. Since 1 September 2009 the secretarial function has been
carried out by RCM (UK) Limited.
A summary of the terms of the agreements with SL Investment
Management Limited and RCM (UK) Limited are set out in note 5 to
the financial statements. After due consideration of the resources
and reputation of SL Investment Management Limited and RCM (UK)
Limited, the Board believes it is in the interests of shareholders
to retain the services of both SL Investment Management Limited and
RCM (UK) Limited for the foreseeable future.
The Company maintains Directors' and Officers' liability
insurance which provides insurance cover for Directors against
certain personal liabilities which they may incur by reason of
their duties as Directors.
The Company has a procedure whereby the Directors are entitled
to obtain independent advice where relevant.
All Directors of the Company are non-executive. The Board as a
whole fulfils the function of the Remuneration Committee and
carries out periodic reviews of Directors' fees, after seeking
independent advice.
Board Committees
The Board has established itself as an Audit Committee, which
has defined terms of reference and duties. This Committee meets
when necessary, but at least twice a year, with the Auditor of the
Company with a view to providing further assurance of the quality
and reliability of, inter alia, the financial information used by
the Board in the financial statements. This Committee is
responsible for the review of the Annual Financial Report and
half-yearly Financial Report, terms of appointment of the Auditor
together with their remuneration, as well as the non-audit services
provided by the Auditor. It also meets with representatives of the
Manager and Administrator and receives reports on the effectiveness
of the Company's internal controls. Following a recommendation from
the Audit Committee, the Board has concluded that there is no
current need for the Company to have an internal audit function;
all of the Company's management functions are delegated to the
Manager, Administrator or Investment Manager, all of whom have
their own compliance departments. The Chairman of the Audit
Committee is DIW Reynolds.
The Audit Committee also reviews any non-audit services provided
by the Auditor. Such services have normally been limited to the
provision of advice on tax compliance. The non-audit fees, being
fees for reporting accountant services in respect of the Placing
and Open Offer, amounted to GBP50,000 (2012: GBP3,800) compared
with audit fees of GBP23,933 (2012: GBP27,300). Non-audit services
are pre-approved by the Audit Committee after they are satisfied
that relevant safeguards are in place to protect Auditor
objectivity and independence. As such, the Audit Committee is
satisfied that the provision of such advice does not in any way
prejudice the objectivity and independence of the Auditor.
The Audit Committee reviews cost-effectiveness and quality of
the external audit on an annual basis and opens the role of Auditor
to tender when appropriate. During the course of the external
audit, the Audit Committee discusses with the Auditor any findings
or issues that may arise, without the presence of the Manager or
Investment Manager, if required.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Directors' Report (continued)
For the year ended 30 June 2013
The Board (continued)
The Board carries out the functions of a Nominations Committee
and makes recommendations on the appointment of new Directors. The
Committee meets at least annually to ensure that the Board has a
balance of skills to carry out its fiduciary duties and to select
and appoint suitable candidates for appointment when necessary. A
variety of sources, including the use of external search
consultants, may be used to ensure that a wide range of candidates
is considered. The Board has decided not to establish Remuneration
and Management Engagement Committees as these functions are carried
out by the Board. This includes an annual review of the contracts
with the Manager and the Investment Manager and whether they are in
the best interests of shareholders.
The terms of reference for the Audit Committee are available for
inspection on the Company's website, www.allianzgi.co.uk/TLI or
available on request from the Company Secretary.
The emoluments of the Directors for the year were as
follows:
30 June 30 June 2012
2013
GBP GBP
CPG Tracy (Chairman) 26,250(*) 20,000
DIW Reynolds 22,500(*) 17,500
SM Zein 14,558(*) 15,000
JPHS Scott 20,000(*) 15,000
TJ Emmott 5,404(*) -
------------------ -------------
88,712- 67,500
================== =============
(*) Includes one-off additional payments of GBP5,000 per
Director to reflect the extra work done during the year in relation
to the share issue and related matters.
The figures above represent emoluments earned as Directors
during the relevant financial year. The Directors receive no other
remuneration or benefits from the Company other than the fees
stated above.
In the year to 30 June 2013 Directors were paid at the rate of
GBP15,000 per annum with the Chairman of the Board receiving an
extra GBP5,000 per annum and the Chairman of the Audit Committee an
extra GBP2,500 per annum. With effect from 1 January 2013 the
additional fees payable to the Chairman of the Board were increased
to GBP7,500 per annum; fees for other Directors are unchanged at
GBP15,000. Per note 6 to the financial statements the Directors'
fees and expenses of GBP92,948 (2012: GBP76,852) included allowable
expenditure of GBP4,236 (2012: GBP7,877) and employers' national
insurance.
The number of formal meetings of the Board and the Audit
Committee held during the financial year and the attendance of
individual directors and members of the Audit Committee are shown
below:
Board Audit Committee
-------------------- ------ ----------------
No. of meetings in
the year 6 2
-------------------- ------ ----------------
CPG Tracy 6 2
-------------------- ------ ----------------
DIW Reynolds 6 2
-------------------- ------ ----------------
JPHS Scott 5 1
-------------------- ------ ----------------
SM Zein 4 1
-------------------- ------ ----------------
TJ Emmott 3 1
-------------------- ------ ----------------
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Directors' Report (continued)
For the year ended 30 June 2013
Relations with shareholders
The Board regularly monitors the shareholder profile of the
Company. It aims to provide shareholders with a full understanding
of the Company's activities and performance, and reports formally
to shareholders twice a year by way of the Annual Financial Report
and the half yearly Financial Report. This is supplemented by the
monthly publication, through the London Stock Exchange, of the net
asset value of the Company's shares and the publication twice
yearly of Interim Management Statements.
All shareholders are encouraged to participate in the Company's
Annual General Meeting, which is being held this year on 13
November at 1.30pm. All Directors normally attend the Annual
General Meeting, at which shareholders have the opportunity to ask
questions and discuss matters with the Directors, the Manager and
the Investment Manager.
Accountability and audit
a) Directors' responsibilities in relation to the financial statements
The Directors have responsibility for ensuring that the Company
keeps accounting records which disclose with reasonable accuracy at
any time the financial position of the Company and which enable
them to ensure that the financial statements comply with The
Companies (Guernsey) Law, 2008, as amended. They have general
responsibility for taking such steps as are reasonably open to them
to safeguard the assets of the Company and to prevent and detect
fraud and other irregularities.
b) Statement of going concern
The Board considered carefully the issue of 'going concern',
specifically in relation to the availability of funding. Total
borrowings under the agreement with AIB decreased to circa US$5.9
million as at 30 June 2013 from circa US$29.2 million as at 30 June
2012. At this level the margin of cover required under the
agreement was comfortably met.
On 30 October 2012, the Company signed a renewal of the loan
agreement with AIB up to 31 March 2014, which will cover the
Company's cash flow requirements up to that date.
The Board has considered the position should AIB not renew the
agreement beyond March 2014. Acknowledging that this might involve
the forced sale of policies in an illiquid market, the Board is
nevertheless confident that the sales required to cover outstanding
borrowings could be completed. To the extent that the prices
achieved did not match those in the valuation, the net asset value
of the Company could be adversely affected, but the Company would
remain a going concern.
c) Internal control
The Directors acknowledge that they are responsible for
establishing and maintaining the Company's system of internal
control and reviewing its effectiveness. Internal control
systems
are designed to manage rather than eliminate the failure to
achieve business objectives and can only provide reasonable and not
absolute assurance against material misstatement or loss. They have
therefore established an ongoing process designed to meet the
particular needs of the Company in managing the risks to which it
is exposed, consistent with the guidance provided by the Turnbull
Committee. Such review procedures have been in place throughout the
full financial year and up to the date of the approval of the
financial statements and the Board is satisfied with their
effectiveness.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Directors' Report (continued)
For the year ended 30 June 2013
Accountability and audit (continued)
c) Internal control (continued)
This process involves a review by the Board of the Company's
internal control report and review of the control environment
within the Company's service providers to ensure that the Company's
requirements are met.
The Company does not have an internal audit function. The Board
has considered the need for an internal audit function but has
decided to place reliance on the Administrator's, Manager's,
Investment Manager's and Custodian's systems and internal audit
procedures.
These systems are designed to ensure effectiveness and efficient
operations, internal control and compliance with laws and
regulations. In establishing the systems of internal control regard
is paid to the materiality of relevant risks, the likelihood of
costs being incurred and costs of control. It follows therefore
that the systems of internal control can only provide reasonable
but not absolute assurance against the risk of material
misstatement or loss.
The effectiveness of the internal control systems is reviewed
annually by the Board and the Audit Committee.
The Audit Committee has a discussion annually with the Auditor
to ensure that there are no issues of concern in relation to the
audit opinion on the accounts and, if necessary, representatives of
the Investment Manager and Manager would be excluded from that
discussion. The Audit Committee reviews the scope and results of
the external audit, its cost effectiveness, the balance of audit
and non-audit services and the independence and objectivity of the
external Auditor. In the Directors' opinion the Auditor is
considered independent.
It is the opinion of the Directors that the continuing
appointment of the Manager on the terms agreed is in the interests
of the Company's shareholders as a whole. The main reasons for this
opinion are the extensive investment management resources of the
Manager and its experience in managing and administering investment
trust companies.
It is also the opinion of the Directors that the continuing
appointment of the Investment Manager on the terms agreed is in the
interests of the Company's shareholders as a whole. The main
reasons for this opinion are their extensive knowledge of the US
traded life interest market and their valuation together with the
complex financial and investment modelling related thereto.
Financial risk profile
The Company's financial instruments comprise investments, cash
and various items such as debtors, creditors etc that arise
directly from the Company's operations. The main purpose of these
instruments is the investment of Shareholders' funds.
Note 20 to the financial statements details matters relating to
risk management. A summary of some relevant items is given
below.
Market price and longevity risk
One of the main risks arising from the Fund's financial
instruments is longevity risk, i.e. the risk that actual mortality
rates differ from predicted values. To the extent that TLIs are
held to maturity this will affect the rate of return earned on
individual policies. To the extent that
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Directors' Report (continued)
For the year ended 30 June 2013
Market price and longevity risk (continued)
policies have to be sold, longevity risk is a key factor in
determining the market value of policies, although market values
are also affected by a number of other factors.
Discount rate risk
Depending on supply and demand in the TLI market, there is a
risk the IRR of 12% currently being used for valuation purposes may
no longer be appropriate.
Foreign currency risk
Foreign currency risk is the risk that the fair value of a
financial instrument will fluctuate because of changes in foreign
exchange rates.
Initially, and until funds were required for investment into the
TLIs, the Fund's assets were maintained in sterling. Funds required
for investment were converted into US dollars and would remain in
US dollar assets until their expected conversion into sterling as
the portfolio matured. The Company's policy historically was to
hedge its US dollar net asset exposure, but, following the special
resolution passed at an Extraordinary General Meeting on 20
September 2011, this policy no longer applies and the Company has
closed out its foreign currency contracts.
Continuation of the Company
The Company was incorporated in 2004 with a fixed life with an
expected winding up date of 31 March 2012. At an Extraordinary
General Meeting of the Company held on 28 August 2009, a Special
Resolution was passed by shareholders to adopt a new Memorandum and
Articles of Incorporation. As a result, Article 44.1 of the
Company's Articles of Incorporation now gives shareholders the
right to vote at the Annual General Meeting to be held in 2013 and
at every Annual General Meeting thereafter, on whether to continue
the business of the US Traded Life Interests Fund of the
Company.
The Directors wish to draw Shareholders' attention to Resolution
6 in the Notice of Annual General Meeting, which proposes that the
business of the US Traded Life Interests Fund of the Company be
continued until the Annual General Meeting to be held in 2014.
Auditor
A resolution to re-appoint Deloitte LLP as Auditor will be
proposed at the next Annual General Meeting.
At the date of approval of the financial statements the
Directors confirm that:
-- so far as each Director is aware, there is no relevant audit
information of which the Company's Auditor is unaware; and
-- the Directors have taken all steps they ought to have taken
as Directors to make themselves aware of any relevant audit
information and to establish that the Company's Auditor is aware of
that information.
This confirmation is given and should be interpreted in
accordance with the provisions of Section 249 of The Companies
(Guernsey) Law, 2008, as amended.
By order of the Board.
JPHS Scott DIW Reynolds
Director Director
1 October 2013
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Directors' Responsibilities Statement
For the year ended 30 June 2013
The Directors are responsible for preparing the Annual Financial
Report and the financial statements in accordance with applicable
law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have elected to prepare the financial statements in accordance with
International Financial Reporting Standards (IFRSs). Under company
law the Directors must not approve the accounts unless they are
satisfied that they give a true and fair view of the state of
affairs of the Company and of the profit or loss of the Company for
that period. In preparing these financial statements, International
Accounting Standard 1 requires that Directors:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance; and
-- make an assessment of the company's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with The Companies (Guernsey) Law,
2008, as amended. They are also responsible for safeguarding the
assets of the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in Guernsey and the United Kingdom
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with
International Financial Reporting Standards, give a true and fair
view of the assets, liabilities, financial position and profit or
loss of the Company.
-- the Investment Manager's Review and Director's Report
includes a fair review of the development and performance of the
business and the position of the Company, together with a
description of the principal risks and uncertainties the Company
faces.
By order of the Board.
JPHS Scott DIW Reynolds
Director Director
1 October 2013
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Independent Auditor's Report to the Members of Alternative Asset
Opportunities PCC Limited
For the year ended 30 June 2013
We have audited the financial statements of Alternative Asset
Opportunities PCC Limited for the year to 30 June 2013 which
comprises the Statement of Comprehensive Income, the Statement of
Financial Position, the Statement of Changes in Redeemable
Participating Preference Shareholders' Funds, the Statement of Cash
Flows, the Portfolio Statement and the related notes 1 to 22. The
financial reporting framework that has been applied in their
preparation is applicable law and International Financial Reporting
Standards ("IFRSs").
This report is made solely to the Company's members, as a body,
in accordance with Section 262 of The Companies (Guernsey) Law,
2008, as amended. Our audit work has been undertaken so that we
might state to the Company's members those matters we are required
to state to them in an auditor's report and for no other purpose.
To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company's
members as a body, for our audit work, for this report, or for the
opinions we have formed.
Respective responsibilities of Directors and Auditor
As explained more fully in the Directors' Responsibilities
Statement, the Directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true
and fair view. Our responsibility is to audit and express an
opinion on the financial statements in accordance with applicable
law and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board's
Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from
material misstatement, whether caused by fraud or error. This
includes an assessment of: whether the accounting policies are
appropriate to the Company's circumstances and have been
consistently applied and adequately disclosed; the reasonableness
of significant accounting estimates made by the Directors; and the
overall presentation of the financial statements. In addition, we
read all the financial and non-financial information in the annual
report to identify material inconsistencies with the audited
financial statements. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications for
our report.
Opinion on financial statements
In our opinion the financial statements:
-- give a true and fair view of the state of the Company's
affairs as at 30 June 2013 and of its loss for the year then
ended;
-- have been properly prepared in accordance with IFRSs; and
-- have been prepared in accordance with the requirements of The
Companies (Guernsey) Law, 2008, as amended.
Emphasis of matter
In forming our opinion on the financial statements, which is not
modified, we have considered the adequacy of the disclosure in;
-- note 2 (b) of the financial statements, which concerns the
Company's actuarial valuation model applied in determining the fair
value of its Traded Life Interests ("TLIs). The methodology adopted
by the Directors is on the basis that these investments are
intended to be held to maturity and makes assumptions over life
expectancies and discount rates. By their nature, assumptions over
life expectancies are uncertain and due to the low levels of
trading in TLIs there is also uncertainty over the estimation of
market based discount rates. For these reasons note 2 (b) to
the
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Independent Auditor's Report to the Members of Alternative Asset
Opportunities PCC Limited (continued)
For the year ended 30 June 2013
Emphasis of matter (continued)
financial statements highlights that these valuation are
materially higher than the expected realisable value of these
investments in a short term sale.
-- note 2 (c) of the financial statements, which concerns the
Company's renegotiation of its borrowing facilities, which have
been renewed until 31 March 2014. Whilst the Board is confident
that the loan will be extended beyond that date to allow sufficient
funding to meet ongoing premium commitments arising from the TLI
portfolio, there is no certainty that the extension will be
approved, at which point the Company would need to realise a
proportion of its TLI portfolio to continue as a going concern. The
expected proceeds receivable in such a situation are materially
lower than the carrying value in the financial statements. The
financial statements have not made any adjustment to the valuation
of the TLI portfolio that would be required under this future
scenario as no decision to sell the portfolio has been made.
Whilst it is not possible to quantify the effects of these
uncertainties on the financial statements, the Chairman's Statement
on page 10 and note 20 discloses a sensitivity analysis in respect
of both the life expectancies and discount rate assumptions which
quantifies the effect on the Company's net asset value per share
for the selected range of scenarios. In this respect, the higher
IRR scenarios are likely to better represent the realisable value
of investments in a short term sale.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under The Companies (Guernsey) Law, 2008, as amended we are
required to report to you if, in our opinion:
-- adequate accounting records have not been kept; or
-- the financial statements are not in agreement with the
accounting records and returns; or
-- we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
-- the part of the Corporate Governance Statement relating to
the Company's compliance with the nine provisions of the UK
Corporate Governance Code specified for our review.
Richard Garrard
for and on behalf of Deloitte LLP
Chartered Accountants and Recognised Auditor
St. Peter Port
Guernsey
1 October 2013
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Statement of Comprehensive Income
For the year ended 30 June 2013
Notes Year to 30 June 2013 Year to 30 June 2012
Revenue Capital Total Revenue Capital Total
GBP GBP GBP GBP GBP GBP
Operating income/(losses)
Net (losses)/gains
on investments 10 - (6,378,059) (6,378,059) - 4,114,252 4,114,252
Foreign exchange
gains/(losses) 17 - 198,281 198,281 - (1,359,612) (1,359,612)
Interest and similar
income 4 3,775 - 3,775 4,205 - 4,205
------------ ------------ ------------ ------------ ------------ ------------
Total income/(losses) 3,775 (6,179,778) (6,176,003) 4,205 2,754,640 2,758,845
Operating
expenses
Management
fee 5 (146,320) - (146,320) (122,657) - (122,657)
Investment manager's
fee 5 (156,423) - (156,423) (123,010) - (123,010)
Custodian fee (18,289) - (18,289) (15,908) - (15,908)
Other expenses 6 (338,854) - (338,854) (384,495) - (384,495)
Total operating
expenses before
finance costs (659,886) - (659,886) (646,070) - (646,070)
Operating
(loss)/profit
before finance
costs (656,111) (6,179,778) (6,835,889) (641,865) 2,754,640 2,112,775
Finance costs
Loan interest
payable 14 (471,664) - (471,664) (514,942) - (514,942)
Net
(deficit)/surplus (1,127,775) (6,179,778) (7,307,553) (1,156,807) 2,754,640 1,597,833
============ ============ ============ ============ ============ ============
(Deficit)/surplus
per redeemable
share 8 (1.86p) (10.17p) (12.02p) (2.89p) 6.89p 4.00p
The revenue column of this statement is the revenue account of
the Company.
All revenue and capital items in the above statement derive from
continuing operations.
The notes on pages 33 to 50 are an integral part of these
financial statements.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Statement of Financial Position
As at 30 June 2013
Notes 2013 2012
GBP GBP
Non-current assets
Financial assets at fair value through
profit or loss 10 36,937,381 41,813,775
Current assets
Cash and cash equivalents 12 1,072,662 558,411
Other receivables 11 6,685 16,687
Maturity proceeds
receivable 11 988,989 8,926,008
2,068,336 9,501,106
----------- -----------
Total assets 39,005,717 51,314,881
----------- -----------
Current liabilities
Loan facility 14 3,915,675 18,623,654
Other payables 13 182,564 222,928
4,098,239 18,846,582
----------- -----------
Total liabilities 4,098,239 18,846,582
----------- -----------
Net assets attributable to shareholders 17 34,907,478 32,468,299
Total equity and liabilities (including
amounts due to shareholders) 39,005,717 51,314,881
=========== ===========
Net asset value per share 9 48.5p 81.2p
These financial statements were approved by the Board of
Directors on 1 October 2013.
Signed on behalf of the Board.
JPHS Scott DIW Reynolds
Director Director
1 October 2013
The notes on pages 33 to 50 are an integral part of these
financial statements.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Statement of Changes in Redeemable Participating Preference
Shareholders' Funds
For the year ended 30 June 2013
For the year ended Share Capital Revenue
30 June 2013 Premium reserve reserve Total
GBP GBP GBP GBP
Balance as at 1 July
2012 39,168,236 970,102 (7,670,039) 32,468,299
Deficit for the year - (6,179,778) (1,127,775) (7,307,553)
Issue of shares
shares 9,746,732 - - 9,746,732
Balance as at 30 June
2013 48,914,968 (5,209,676) (8,797,814) 34,907,478
=========== ============ ============ ============
For the year ended Share Capital Revenue
30 June 2012 Premium reserve reserve Total
GBP GBP GBP GBP
Balance as at 1 July
2011 39,168,236 (1,784,538) (6,513,232) 30,870,466
Surplus/(deficit) for
the year - 2,754,640 (1,156,807) 1,597,833
Balance as at 30 June
2012 39,168,236 970,102 (7,670,039) 32,468,299
=========== ============ ============ ===========
The notes on pages 33 to 50 are an integral part of these
financial statements.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Statement of Cash Flows
For the year ended 30 June 2013
Year to Year to
30 June 2013 30 June 2012
GBP GBP
Cash flows from operating activities
Revenue account operating loss before
finance costs for the year (656,111) (641,865)
Decrease/(increase) in other receivables 7,947,021 (8,920,852)
Decrease in other payables (40,365) (6,509,298)
Premiums
paid (5,237,071) (5,326,029)
Proceeds from maturity and sale
of investments 3,735,406 17,654,023
Net cash inflow/(outflow) from operating
activities before interest 5,748,880 (3,744,021)
-------------- --------------
Cash flows from financing
activities
Net (repayment)/receipt of borrowings (14,707,979) 5,484,265
Interest
paid (471,664) (514,942)
Shares issued 9,746,732 -
-------------- --------------
Net cash used in financing activities (5,432,911) 4,969,323
-------------- --------------
Net increase/(decrease) in cash
and cash equivalents 315,969 1,225,302
Cash and cash equivalents at the
beginning of the year 558,411 692,721
Effects of foreign exchange 198,282 (1,359,612)
Cash and cash equivalents at the
end of the year 1,072,662 558,411
============== ==============
The notes on pages 33 to 50 are an integral part of these
financial statements.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Portfolio of Investments
As at 30 June 2013
Portion
Number of A.M. Best
Traded Life Interests ("TLI's") of Policies Valuation Portfolio Rating
*
GBP %
Issuer
American General Life Insurance
Company (TX) 12 8,742,829 23.67% A
Lincoln National Life Insurance
Co 14 6,400,310 17.33% A+
Transamerica Life Insurance
Company 18 5,550,603 15.03% A+
Massachusetts Mutual Life Insurance
Co 5 2,623,512 7.10% A++
MetLife Insurance Company of
Connecticut 6 1,738,071 4.71% A+
Security Life of Denver Insurance
Co 1 1,712,269 4.64% A
John Hancock Life Insurance
Company USA 7 1,690,706 4.58% A+
New York Life Insurance and
Annuity Corp 5 1,435,091 3.89% A++
Aviva Life and Annuity Company 4 1,413,671 3.83% A-
Pacific Life Insurance Company 4 851,422 2.31% A+
Genworth Life Insurance Company 1 837,090 2.27% A
Columbus Life Insurance Company 2 591,377 1.60% A+
Lincoln Benefit Life Company 1 414,297 1.12% A+
North American Company for
L & H Ins 2 372,547 1.01% A+
MONY Life Insurance Company
of America 1 329,871 0.89% A
AXA Equitable Life Insurance
Company 3 321,583 0.87% A+
Aviva Life and Annuity Company
of NY 2 298,951 0.81% A-
Lincoln Life & Annuity Company
of NY 1 278,629 0.75% A+
United of Omaha Life Insurance
Company 2 277,202 0.75% A+
Banner Life Insurance Company 2 250,142 0.68% A+
ING Life Insurance and Annuity
Company 2 227,193 0.62% A
ReliaStar Life Insurance Company 2 217,021 0.58% A
Standard Insurance Company 1 136,161 0.36% A
Security Mutual Life Insurance
Co of NY 1 133,894 0.35% A-
General American Life Insurance
Company 1 54,893 0.15% A+
Beneficial Life Insurance Company 1 38,046 0.10% A-
Jackson National Life Insurance
Company 1 - 0.00% A+
102 36,937,381 100.0%
-------------- ------------ -----------
Portfolio Total 36,937,381 100.0%
============ ===========
* As at 30 June 2013
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements
For the year ended 30 June 2013
1 Principal activity
The Company is a Guernsey registered closed-ended protected cell
company established with one cell known as the US Traded Life
Interests Fund (the "Fund" or "Cell"). The redeemable preference
shares (the "Shares") in the Company have been admitted to the
Official List of the UK Listing Authority with a premium listing
and to trading on the London Stock Exchange's main market for
listed securities. The Company's objective in respect of the Fund
is to provide investors with an attractive capital return through
holding to maturity (or until the end of the life of the Fund), a
diversified portfolio of US Traded Life Interests ("TLIs"),
notwithstanding the Company may make sales of selected policies
from time to time.
2 Principal Accounting Policies
(a) Basis of preparation
Statement of compliance
The financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRSs) issued by the
International Accounting Standards Board (IASB) and with the
Statement of Recommended Practice 'Financial Statements of
Investment Trust Companies and Venture Capital Trusts' (SORP)
issued in January 2009 by the Association of Investment
Companies.
Basis of measurement
The financial statements have been prepared under the historical
cost convention as modified by the revaluation of investments and
derivatives, as detailed above.
The financial statements have been prepared on a total company
basis and not on a cell-by-cell basis as there is currently only
one cell. The only non-cellular assets and liabilities are in
respect of the two management shares of no par value issued at GBP1
each fully paid represented by cash at bank. As they are immaterial
they have been excluded from the financial statements.
Functional and Presentational Currency
The financial information shown in the financial statements is
shown in sterling, being the Company's functional and
presentational currency.
Critical accounting judgements and key sources of estimation
uncertainty
The preparation of Financial Statements in conformity with IFRSs
requires management to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts of
assets and liabilities, income and expenses. The estimates and
associated assumptions are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making
judgements about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates. The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognised in the year in which the
estimate is revised if the revision affects only that year, or in
the year of the revision and future years if the revision affects
both current and future years. Such judgements and key sources of
estimation uncertainty include the valuation of investments and the
going concern assumption, which are discussed in note 2(b) and 2(c)
respectively.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
2 Principal Accounting Policies (continued)
(a) Basis of preparation (continued)
Adoption of new and revised standards
In the current year, the Company has not adopted any new or
revised standards that have had a material impact on the financial
statements.
At the date of authorisation of these financial statements, the
following standards and interpretations which have not been applied
in these financial statements were in issue but not yet
effective.
IFRS 9 "Financial Instruments"
IFRS 10 "Consolidated Financial Statements"
IFRS 11 "Joint Arrangements"
IFRS 12 "Disclosure of Interests in Other Entities"
IFRS 13 "Fair Value Measurement"
IAS 1 (amended) "Presentation of items of other comprehensive
income"
IAS 12 (amended) "Deferred Tax: Recovery of Underlying
Assets"
IAS 19 (amended) "Employee benefits"
IAS 24 (amended) "Related Party Disclosure"
IAS 27 (amended) "Separate Financial Statements (2011)"
IAS 28 "Investments in Associates and Joint Ventures (2011)"
IAS 32 (amended) "Classification of Rights Issue"
IFRIC 19 "Extinguishing Financial Liabilities with Equity
Instruments"
IFRIC 14 (amended) "Prepayments of a Minimum Funding
Requirement"
The Directors do not expect that the adoption of the standards
listed above will have a material impact on the financial
statements of the Company in future periods.
(b) Valuation of Investments
US Traded Life Interest Investments
The Company primarily invests in US Traded Life Interests
("TLIs") which it intends to hold to maturity or until the end of
the life of the Fund. The Company has only invested in Whole of
Life and Universal Life policies. All TLI investments are
classified as fair value through profit and loss on initial
recognition.
Recognition and basis of measurement
Purchases of TLIs are recognised on a trade date basis and are
initially held at cost, being the consideration given.
Valuation
As the market for TLIs is thin, and there is little published
information on these investments, there are no reliable market
prices. The TLIs are valued monthly at the Directors' discretion.
The methodology adopted by the Directors intends to reflect the
fair value of the policies. This methodology uses a discounted cash
flow method.
The value of a TLI policy is the present value of its net
expected future cash flows. The calculation uses the following data
and assumptions provided by third party LE underwriters, the
Investment Manager (or the Directors, where stated):
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
2 Principal Accounting Policies (continued)
(b) Valuation of Investments (continued)
-- Death benefit payable under the policy;
-- Mortality using the 2008 Valuation Basic Table (Ultimate) and
the most recent life expectancy for each policy;
-- Premiums payable under the policy; and
-- An estimate of a market based discount rate derived by the Directors.
If the most recent life expectancy was obtained prior to 1 April
2013 then that life expectancy has been uplifted by an adjustment
factor or 12%, as explained in the Chairman's statement.
There is inherent uncertainty within this basis of valuation and
this valuation may be materially different from either the value on
maturity or the realisable sale value of these investments.
United Kingdom Gilts
The Company also invested in a United Kingdom Gilt ("UK Gilt")
which it intended to hold to maturity or until the end of the life
of the Fund. The UK Gilt was classified as fair value through
profit and loss on initial recognition. During the year under
review the UK Gilt was sold.
Recognition and basis of measurement
Purchases of UK Gilts are recognised on a trade date basis and
are initially held at cost, being the consideration given.
Valuation
The UK Gilt was valued monthly at the clean bid market price
available at each valuation date. Accrued interest was included
within sundry debtors.
De-recognition
The Company de-recognises a financial asset when the contractual
rights to cash flows from the financial asset expire. A financial
liability is de-recognised when the obligation specified in the
contract is discharged, cancelled or expired. TLI investments are
de-recognised on the date of death of the insured or on the trade
date if a policy is sold.
(c) Going concern
The Board considered carefully the issue of 'going concern',
specifically in relation to the availability of funding. Total
borrowings under the agreement with AIB reduced to circa US$5.9
million as at 30 June 2013 from circa US$29.2 million as at 30 June
2012. At this level the margin of cover required under the
agreement was comfortably met.
On 30 October 2012, the Company signed a renewal of the loan
agreement with AIB up to 31 March 2014, which is designed to cover
the Company's cash flow requirements up to that date, even if no
policies mature. The Board has considered the position should AIB
not renew the agreement beyond 31 March 2014. Acknowledging that
this might involve the sale of policies in an illiquid market, the
Board is nevertheless confident that the sales required to cover
outstanding borrowings could be completed. To the extent that the
prices achieved did not match those in the valuation, the net asset
value of the Company would be adversely affected, but the Company
would remain a going concern.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
2 Principal Accounting Policies (continued)
A continuation vote will be put to the Shareholders at the 2013
Annual General Meeting. While the Directors cannot be certain what
the result of this vote will be, the financial statements are
prepared on a going concern basis supported by the Directors'
current assessment of the Company's ability to continue in
existence for the foreseeable future and shareholder interest in
the continuation of the Company. Based on the above, the Directors
have reasonable expectation that the Company has adequate resources
to continue in operational existence for the foreseeable future,
and they continue to adopt the going concern basis.
(d) Interest income
Bank deposit interest is accounted for on an accruals basis.
(e) Expenses
Expenses are accounted for on an accruals basis and all amounts
have been allocated to the Statement of Comprehensive Income -
revenue account.
(f) Foreign exchange
Foreign currency monetary assets and liabilities are translated
into sterling at the rate of exchange ruling at the reporting date.
Transactions in foreign currencies are translated into sterling at
the rate ruling at the date of the transaction. Realised and
unrealised foreign exchange gains and losses are recognised in the
Statement of Comprehensive Income and in the capital reserve -
realised, and capital reserve - unrealised, respectively.
(g) Bank borrowings
Interest bearing bank loans and overdrafts are recorded when the
proceeds are received. Interest payments are recognised in the
Statement of Comprehensive Income in the period in which they are
incurred.
3 Segmental Reporting
The Board has considered the requirements of IFRS 8 'Operating
Segments'. The Board has determined that the Company is engaged in
a single segment of business, being investment in a portfolio of
TLIs. The Board, as a whole, has been determined as constituting
the chief operating decision maker of the Company.
The Board has overall responsibility for the assets of the
Company in accordance with the investment objective and policy, and
subject to advice received from the Investment Manager.
Whilst the Investment Manager may make the investment decisions
on a day-to-day basis, any changes to the investment strategy or
major allocation decisions have to be approved by the Board, even
though they may be proposed by the Investment Manager. The Board
therefore retains full responsibility as to the investment strategy
or major allocation decisions. The Investment Manager is required
to act under the terms of the prospectus which cannot be radically
changed without the approval of the Board and the shareholders.
The key measure of performance used by the Board to assess the
Company's performance and to allocate resources is the total return
of the Company's net asset value, as calculated under IFRS, and
therefore no reconciliation is required between the measure of
profit or loss used by the Board and that contained in the
financial statements.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
4 Interest and similar income
Year to Year to
30 June 2013 30 June
2012
GBP GBP
Bank deposit
interest 774 216
Bond interest 3,001 3,989
Total income 3,775 4,205
============== =========
5 Investment management and management fees
SL Investment Management Limited, the Investment Manager, was
appointed under an agreement with the Company and other parties
dated 16 March 2004, as amended and restated on 20 July 2004. The
agreement may be terminated by either party giving not less than 12
months notice or shorter notice as the parties may agree to
accept.
From 1 September 2009 the fee payable to the Investment Manager
is 0.475% per annum of the Company's Gross Assets. With effect from
1 April 2012 the fee was reduced to 0.4% per annum of the Company's
Gross Assets.
RCM (UK) Limited, the Manager, was appointed under an agreement
with the Company dated 16 March 2004 to manage the fixed interest
and near cash assets of the Company in accordance with the
investment policy and to implement the currency hedging facility
from time to time approved by the Directors. Either party giving
not less than 12 months notice may terminate the agreement.
The fee payable to the Manager is 0.4% per annum of the
Company's Gross Assets and a fixed fee of GBP20,000 per annum for
the provision of Administration and Secretarial Services. With
effect from 1 July 2013 the fee payable to the Manager was reduced
to 0.3% per annum of the Company's Gross Assets. From the same date
the fixed fee for the provision of Administration and Secretarial
Services was increased from GBP20,000 to GBP30,000 per annum.
With effect from 1 September 2009 the fixed fee payable under
Administration Agreement between the Company and Kleinwort Benson
(Channel Islands) Fund Services Limited (formerly Kleinwort Benson
(Guernsey) Fund Services Limited) is GBP50,000 per annum.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
6 Other expenses
Year to Year to
30 June 2013 30 June 2012
GBP GBP
Administration and accountancy
fees 49,699 37,085
Secretarial fees 19,936 20,001
Broker fees 48,413 31,444
Directors' fees, national
insurance and expenses 92,948 76,852
D&O Insurance 10,364 7,546
Auditor's remuneration 23,933 31,094
Legal and professional
fees 10,099 23,652
Printing 9,355 4,392
Safe custody
fees 17,159 22,178
Bank fees and
charges 315 29,191
Registrar fees 15,073 9,438
Cost of obtaining new
LEs 16,269 56,437
Sundry expenses
* 25,291 35,185
338,854 384,495
============== ==============
* Sundry expenses include mailing services, tax exempt fees,
stock exchange fees and other sundry costs.
7 Taxation
The Company is exempt from Guernsey Income Tax under the Income
Tax (Exempt Bodies) (Guernsey) Ordinance 1989 and 1992 and is
charged an annual exemption fee of GBP600 which is included in
sundry expenses.
The Company adopted UK tax residency from 1 September 2009
onwards. Since that date the Company has been managed in such a way
as to meet the conditions for approval as an investment trust under
Section 1158 of the Corporation Tax Act 2010. As an investment
trust, the Company is subject to corporation tax on its income, but
no corporation tax is provided for in these accounts, as the
Company has significant unutilised tax losses which are not deemed
to be recoverable. The Company was approved by HM Revenue &
Customs as an investment trust in accordance with Section 1158 of
the Corporation Tax Act 2010 for the year to 30 June 2012.
Under the new investment trust regime rules affecting accounting
periods commencing on or after 1 January 2012 an initial
application must be submitted to HM Revenue & Customs for entry
into the regime and the Company must thereafter demonstrate
annually compliance with the regulations. In December 2012 the
Company received confirmation from HM Revenue & Customs as an
approved investment trust for accounting periods commencing on or
after 1 July 2012 subject to the Company continuing to meet the
eligibility conditions at Section 1158 Corporation Tax Act 2010 and
the ongoing requirements in Chapter 3 of Part 2 Investment Trust
(Approved Company) Tax Regulations 2011 (Statutory Instrument
2011/2999).
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
8 Return per share
Revenue deficit per Share is based on the net deficit
attributable to the Shares of GBP1,127,775 (2012: deficit
GBP1,156,807) and on the average number of Shares in issue of
60,778,082 (2012: 40,000,000). Capital deficit per Share is based
on the net capital return attributable to the Shares of
GBP6,179,778 (2012: return GBP2,754,640) and on the average number
of Shares in issue of 60,778,082 (2012: 40,000,000).
9 Net Asset Value per Share
The diluted and undiluted net asset value per Share is based on
net assets attributable to the Shares of GBP34,907,478 (2012:
GBP32,468,299) and on the 72,000,000 (2012: 40,000,000) Shares in
issue at the year end.
10 Investments
Year to Year to
(a) Investments at fair value through 30 June 30 June
profit or loss 2013 2012
GBP GBP
Movements in the year:
Opening valuation 41,813,775 50,027,517
Premiums paid 5,237,071 5,326,029
Proceeds from the maturity and sale
of investments (3,735,406) (17,654,023)
Net realised gain on maturities 1,139,032 2,471,093
Movement in unrealised (depreciation)/appreciation
on revaluation of investments (7,517,091) 1,643,159
Closing valuation 36,937,381 41,813,775
------------- -------------
Comprising:
Closing book cost 50,610,534 47,969,837
Closing unrealised loss (13,937,381) (6,156,062)
Closing valuation 36,937,381 41,813,775
============= =============
(b) Net gain/(loss) on investments Year to Year to
held at fair value through profit 30 June 2013 30 June
or loss 2012
GBP GBP
Net realised gain on maturities 1,139,032 2,471,093
Movement in unrealised depreciation
on revaluation of investments (7,517,091) 1,643,159
(6,378,059) 4,114,252
-------------- ----------
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
(c) Derivative financialinstruments
There were no open forward currency contracts as at 30
June 2013 and as at 30 June 2012.
11 Other receivables and maturity proceeds receivable
30 June 2013 30 June 2012
GBP GBP
Sundry debtors 6,685 16,687
Maturity proceeds
receivable 988,989 8,926,008
995,674 8,942,695
============= =============
The carrying value for the current and prior year is materially
the same as the fair value.
12 Cash and cash equivalents
Any amounts held on deposit or in current accounts at the
Company's Custodian, Sub-Custodian or financial institutions are
included in cash or cash equivalents. The carrying value for the
current and prior year is materially the same as the fair
value.
13 Other payables
30 June 2013 30 June 2012
GBP GBP
Accrued expenses 182,564 222,928
182,564 222,928
============= =============
The carrying value for the current and prior year is materially
the same as the fair value.
14 Loan facility
As at 30 June 2013 the Company's drawings on its loan agreement
with AIB were US$nil (2012: US$27.5 million) on the term loan and
US$5.9 million (2012: US$1.7 million) on the revolving credit
facility. Interest is payable at LIBOR plus 4.0% (2012: 4.0%) on
the term loan and the revolving credit facility. As at 30 June 2013
a total of US$5,938,906 (GBP3,915,675) was outstanding (2012:
US$29,210,276 (GBP18,623,654)). On 30 October 2012, the Company
signed a renewal of the loan agreement with AIB up to 31 March
2014. This will allow the Company to continue fulfilling its
obligations, including the payment of premiums until that date.
Under the loan agreement, the primary covenant obliges the
Company to maintain cover (i.e. asset value, subject to certain
adjustments, divided by borrowings) above 2.5 times. The current
cover ratio, based upon the restated asset valuation at 30 June
2013, is 9.4 times (2012: 1.5times).
15 Share capital and share premium
The share capital of the Company is two Management Shares of no
par value and an unlimited number of Redeemable Participating
Preference Shares (the "Shares") of no par value.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
15 Share capital and share premium (continued)
The two Management Shares were issued at GBP1 each fully paid
and are beneficially owned by the Manager. The Management Shares do
not carry any rights to dividends and holders of Management Shares
are only entitled to participate in the non-cellular assets of the
Company on a winding-up.
40,000,000 Shares were issued in the Fund at GBP1 per Share on
25 March 2004. The issue costs incurred of GBP831,764 were debited
against the share premium account to leave net proceeds of the
share issue of GBP39,168,236.
Following a Placing and Open Offer a further 32,000,000 Shares
were issued on 5 November 2012. The issue costs incurred of
GBP493,268 were debited against the share premium account to leave
proceeds of the share issue of GBP9,746,732.
The holders of Shares attributable to the Fund will be entitled
to participate only in the income, profits and assets attributable
to that fund. On winding up the holders of Shares are entitled to
participate only in the assets of the Fund and have no entitlement
to participate in the distribution of any assets attributable to
any other cell. Holders of Shares are entitled to attend and vote
at general meetings of the Company. At an Extraordinary General
Meeting held on 28 August 2009 the Articles of Incorporation were
amended so that the US Traded Life Interests Fund now has an
unlimited life, subject to regular continuation votes from 2012
onward. Shareholders shall be offered the opportunity to vote on
the continuation of the Fund at the Annual General Meeting in 2013
and annually thereafter.
16 Share buy-backs
By way of an ordinary resolution passed at the Annual General
Meeting held on 14 November 2012, the Company took authority to
make market purchases of fully paid Shares, provided that the
maximum number of Shares authorised to be purchased would be no
more than 5,996,000 Shares or such number as represented 14.99 per
cent. of the Shares in issue as at the date of the Annual General
Meeting, whichever was less (in either case, excluding Shares held
in Treasury). The Company will be seeking to renew this authority
at the forthcoming Annual General Meeting. Such authority will
expire on the date of the next Annual General Meeting, unless
previously renewed, varied, or revoked prior to such date by a
special resolution of the Company in general meeting. During the
year under review no Shares were bought back for cancellation
(2012: nil).
The minimum price which may be paid for a Share pursuant to such
authority is one penny and the maximum price which may be paid
shall be the higher of (1) not more than 5% above the average of
the middle market quotations for a Share in the Company as derived
from The Stock Exchange Daily Official List for the five business
days immediately preceding the day on which such share is
contracted to be purchased, and (2) the higher of the price of the
last independent trade and highest current independent bid on the
relevant market when the purchase is carried out, provided that the
Company shall not be authorised to acquire Shares at a price above
the estimated prevailing net asset value per Share on the date of
purchase.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
17 Net assets attributable to shareholders
Share Premium Capital Revenue
Reserves Reserves Total
2013 2013 2013 2013
GBP GBP GBP GBP
Balance at 1 July
2012 39,168,236 970,102 (7,670,039) 32,468,299
Net realised gain
on maturities - 1,139,032 - 1,139,032
Movement in unrealised
depreciation on
investments - (7,517,092) - (7,517,092)
Issue of share
capital 9,746,732 - - 9,746,732
Net currency losses - 198,282 - 198,282
Revenue loss for
the year - - (1,127,775) (1,127,775)
------------
Balance at 30
June 2013 48,914,968 (5,209,676) (8,797,814) 34,907,478
============== ============ ============ ============
Share Premium Capital Revenue
Reserves Reserves Total
2012 2012 2012 2012
GBP GBP GBP GBP
Balance at 1 July
2011 39,168,236 (1,784,538) (6,513,232) 30,870,466
Net realised gain
on maturities - 2,471,093 - 2,471,093
Movement in unrealised
depreciation on
investments - 1,643,159 - 1,643,159
Realised losses
on forward currency
contracts - (7,403,534) - (7,403,534)
Movement in unrealised
gains on forward
currency contracts - 6,503,596 - 6,503,596
Net currency losses - (459,674) - (459,674)
Revenue loss for
the year - - (1,156,807) (1,156,807)
------------
Balance at 30
June 2012 39,168,236 970,102 (7,670,039) 32,468,299
============== ============ ============ ============
18 Related party transactions
Fees earned by the Directors of the Company during the year were
GBP91,042 of which GBP555 was outstanding at the year end (2012:
GBP76,852 of which GBP8,063 was outstanding at the year end).
Allowable expenses claimed by the Directors in the course of their
duties amounted to GBP4,236 for the year ended 30 June 2013 (2012:
GBP7,877). Fees earned by the Investment Manager, Manager and
Administrator are discussed in note 5.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
19 Categories of financial assets and financial liabilities
The following table analyses the carrying amounts of the
financial assets and liabilities by category as defined in IAS
39.
30 June 2013 30 June 2012
GBP GBP
Financial assets
Cash and cash equivalents 1,072,662 558,411
Fair value through profit or
loss:
TLI Policies 36,937,381 41,699,865
Government Bond - 113,910
------------- -------------
36,937,381 41,813,775
Loans and receivables at amortised
cost 995,674 8,942,695
39,005,717 51,314,881
------------- -------------
Financial liabilities
Loans and payables at amortised
cost (4,098,239) (18,846,582)
------------- -------------
(4,098,239) (18,846,582)
------------- -------------
34,907,478 32,468,299
============= =============
20 Financial risk management objectives and policies
The main risks to which the Company is exposed are market and
longevity risk, currency risk, interest rate risk, liquidity risk
and credit risk.
Fair value measurements
The Company classifies financial instruments using the following
fair value hierarchy that reflects the significance of the inputs
used in making the measurements. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). The
three levels of the fair value hierarchy under IFRS 7 are as
follows:
-- Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities;
-- Level 2 - Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability either
directly (that is, as prices) or indirectly (that is, derived from
prices); or
-- Level 3 - Inputs for the asset or liability that are not
based on observable market data (that is, unobservable inputs).
The level in the fair value hierarchy within which the fair
value measurement is categorised in its entirety is determined on
the basis of the lowest level input that is significant to the fair
value measurement in its entirety. For this purpose, the
significance of an input is assessed against the fair value
measurement in its entirety. If a fair value measurement uses
observable inputs that require significant adjustment based on
unobservable inputs, that measurement is a level 3 measurement.
Assessing the significance of a particular input to the fair value
measurement in its entirety requires judgement, considering factors
specific to the asset or liability.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
20 Financial risk management objectives and policies (continued)
The determination of what constitutes 'observable' requires
significant judgement by the Company. The Company considers
observable data to be that market data that is readily available,
regularly distributed or updated, reliable and verifiable, not
proprietary, and provided by independent sources that are actively
involved in the relevant market.
The following table presents the Company's financial assets and
liabilities by level within the valuation hierarchy as of 30 June
2013.
30 June Percentage 30 June Percentage
2013 of net 2012 of net
assets assets
GBP % GBP %
Level 1 fair value
assets - 0.00 113,910 0.35
Level 3 fair value
assets 36,937,381 105.82 41,699,865 128.28
----------- ----------- ----------- -----------
36,937,381 105.82 41,813,775 128.63
=========== =========== =========== ===========
During the year, the Company sold its holding of UK Treasury
Stock, which was the only investment categorised as level 1 of the
IFRS fair value hierarchy as at 30 June 2012.
The investments categorised as level 3 are the TLI policies held
in the Company's portfolio. The valuation of the TLI policies is
not based on observable market data, but on the valuation model
detailed in note 2(b) used by the Investment Manager to determine
the fair value of the policies held, and therefore these
investments are categorised as level 3 of the IFRS fair value
hierarchy.
Capital risk management
The capital structure of the Company consists of cash and cash
equivalents and net assets attributable to holders of Shares,
comprising issued Shares, capital reserves and revenue reserves as
detailed in note 17. The Company does not have any externally
imposed capital requirements. At 30 June 2013 net assets
attributable to the holders of Shares were GBP34,907,478 (2012:
GBP32,468,299).
As at 30 June 2013, the Company had borrowed circa US$5.9
million from AIB. The existence of these borrowings means that
Shareholder returns are "geared" and that these borrowings may need
to be repaid prior to any return of capital to shareholders.
The Company's investment objective is to provide investors with
an attractive capital return through investment predominantly in a
diversified portfolio of US Traded Life Interests ("TLIs"). The
Company has invested its assets principally in a range of TLIs on
the lives of US citizens aged between 78 and 92 years at the point
of investment.
The Board has overall responsibility for allocating the assets
of the Company in accordance with the investment objective and
policy. The Investment Manager has identified on behalf of the
Board TLIs that are consistent with the Company's investment
objective and policy.
The TLIs acquired are held to maturity or otherwise disposed of
towards the end of the life of the Company or when there is a cash
flow requirement to sell before maturity. The Company is
responsible for payment of policy premiums.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
20 Financial risk management objectives and policies (continued)
Capital risk management (continued)
As at 30 June 2013, the current portfolio comprised 102 TLIs.
All TLIs acquired are Whole-of-Life or Universal Life policies.
The TLIs acquired are policies issued by a range of US life
insurance companies. Each underlying life insurance company had an
A.M. Best credit rating of at least "A" at the time of acquisition
of the relevant policy, and 94.9% of the portfolio still has, the
other 5.1% being A-. A.M. Best is a US credit rating agency which
provides the most comprehensive coverage of the US life company
sector. Once the investment programme was concluded, not more than
15 per cent. of the gross assets of the Company were initially
invested in life policies issued by any single US Life Insurance
Company or Group. This percentage is subject to change dependent on
the maturities realised from the Company's TLI portfolio.
The Investment Manager uses the services of tracking agents to
monitor the status of lives insured in respect of TLIs purchased by
the Company. The agents use tracking methods to ensure both the
Company and the Investment Manager are notified in a timely manner
following the death of an insured. Upon receipt of notification of
the death of an insured, the death certificate is forwarded to the
Sub-Custodian, who then forwards it to the relevant life insurance
company with the original policy document. The life insurance
company will usually pay the Company the proceeds of the policy
within 60 days of receipt of the requisite documents.
Market and longevity risk
The Company's exposure to market risk is comprised mainly of
movements in the valuation of the TLI portfolio, which, in turn,
also reflects the Company's assessment of longevity (life
expectancy) for each policy. The Company's basis of valuation is to
arrive at an estimate of market value by applying an Internal Rate
of Return (IRR) based on market rates to estimates of future cash
flow, based on the life expectancy of the life assured and future
premiums payable.
The market for TLIs is currently thin and the previous practice
of using the results of the Investment Manager's own successful
bids to obtain information on market IRRs has, as a result, been
suspended and replaced with the use of a fixed IRR of 12%. After
discussion with the Investment Manager, the Board does not feel
that the IRRs obtained by the Investment Manager are truly
representative of willing buyer/willing seller pricing. The Board
is aware that there are a number of examples of policies changing
hands in the market at values which imply an assumed IRR of
significantly more than 12%, but does not feel that these IRRs are
necessarily appropriate for the pricing of investments which are
intended to be held to maturity. It is keeping this matter under
active review. Meanwhile, the notes below and the further
information available in the Chairman's Statement give an
indication of the effects on valuation of differing IRR
assumptions.
At 30 June 2013, should the valuation IRR used increase by 4 per
cent with all other variables remaining constant, the decrease in
net assets attributable to shareholders for the period would amount
to GBP4,196,169 (2012: decrease of GBP4,523,933).
At 30 June 2013, should the valuation IRR used decrease by 4 per
cent with all other variables remaining constant, the increase in
net assets attributable to shareholders for the period would amount
to GBP5,446,475 (2012: increase of GBP5,810,927)
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
20 Financial risk management objectives and policies (continued)
Where the life expectancy (LE) for a specific policy has been
obtained since 1 April 2013, this 2013 LE, adjusted for the date on
which the LE was obtained, is used for valuation purposes. The
average increase in 2013 LE for these policies over the most recent
LE obtained prior to April 2013 is then calculated as an adjustment
factor. If no 2013 LE is available, the most recent LE obtained
will be used adjusted for the date on which it was obtained and
uplifted by the calculated adjustment factor. As new LEs are
obtained, they will be used for valuation. The cash flow
projections are then based on the adjusted LEs using standard
actuarial tables.
At 30 June 2013, should the remaining life expectancy of the
lives insured have increased by 1 year with all other variables
remaining constant, the decrease in net assets attributable to
shareholders for the period would amount to GBP9,999,899 (2012:
decrease of GBP10,014,114).
At 30 June 2013, should the remaining life expectancy of the
lives insured have decreased by 1 year with all other variables
remaining constant, the increase in net assets attributable to
shareholders for the period would amount to GBP11,225,420 (2012:
increase of GBP11,058,213).
Currency risk
Currency risk is the risk that the fair value of future cash
flows of a financial asset will fluctuate because of changes in
foreign exchange rates.
The TLIs held by the Company are denominated exclusively in US
dollars, whereas the issued Shares are denominated in sterling. The
Company had no open forward currency contracts as at 30 June
2013.
In the event of a fall in the value of the Company's assets, the
Company may not be able to comply with the borrowing covenants
contained in the Credit Facility Agreement and may be obliged to
sell policies on disadvantageous terms in order to raise cash.
The Company's net currency exposure was as follows:
30 June 2013 30 June 2012
GBP GBP
Exposure to U.S. Dollar 35,092,855 32,502,601
35,092,855 32,502,601
============= =============
At 30 June 2013, had the pound sterling strengthened against the
US dollar by 5% with all other variables held constant, the
decrease in net assets attributable to shareholders would amount to
approximately GBP1,671,088 (2012 decrease: GBP1,547,743). A
weakening of 5% would amount to an increase in net assets
attributable to shareholders of approximately GBP1,846,992 (2012
increase: GBP1,710,663).
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
20 Financial risk management objectives and policies (continued)
Interest rate risk
The Company's interest-bearing financial assets and liabilities
expose it to risks associated with the effects of fluctuations in
the prevailing levels of market interest rates on its financial
position and cash flows.
The Company holds modest amounts of cash on deposit and the only
interest bearing liability is the loan facility, therefore exposure
to changes in interest rates is primarily linked to the cost of the
variable rate loan facility from AIB.
The following table details the Company's exposure to interest
rate risk at 30 June 2013 and 30 June 2012 from its interest
bearing financial instruments:
Financial Fixed rate Floating Total
assets/(liabilities) financial rate financial
on which assets assets/(liabilities)
no interest
is paid
2013 2013 2013 2013
GBP GBP GBP GBP
Sterling (185,377) - - (185,377)
US Dollars 37,935,164 - (2,842,309) 35,092,855
---------------------- ----------- ---------------------- -----------
37,749,787 - (2,842,309) 34,907,478
====================== =========== ====================== ===========
Financial Fixed rate Floating Total
assets/(liabilities) financial rate financial
on which assets assets/(liabilities)
no interest
is paid
2012 2012 2012 2012
GBP GBP GBP GBP
Sterling (167,305) 113,910 19,093 (34,302)
US Dollars 50,586,937 - (18,084,336) 32,502,601
---------------------- ----------- ---------------------- -----------
50,419,632 113,910 (18,065,243) 32,468,299
====================== =========== ====================== ===========
Interest rate risk
The above analysis excludes short term other receivables and
other payables as the material amounts are non-interest
bearing.
No sensitivity analysis has been provided as interest rate risk
is not directly considered material to the Company.
However, large changes in interest rates are likely to impact on
IRRs used in the valuation of TLIs. A sensitivity analysis on IRRs
is included on page 45.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
20 Financial risk management objectives and policies (continued)
Liquidity risk
Liquidity risk is the risk that the Company will encounter
difficulty in meeting obligations associated with its financial
liabilities.
The Company has exposure to liquidity risk as it holds a loan
facility for US$15,000,000 (Revolving Credit Facility) of which
US$5,938,906 was drawn down at 30 June 2013.
On 30 October 2012, the Company signed a renewal of the loan
agreement with AIB up to 31 March 2014, which will cover the
Company's projected cash flow requirements up to that date.
The Board has considered the position should AIB not renew the
agreement beyond 31 March 2014. Acknowledging that this might
involve the forced sale of policies in an illiquid market, the
Board is nevertheless confident that the sales required to cover
outstanding borrowings and the funding of the foreign currency
losses could be completed. To the extent that the prices achieved
did not match those in the valuation, the net asset value of the
Company would be adversely affected, but the business would remain
a going concern.
The maturity profile of the Company's financial liabilities is
set out below. The future premiums payable on the Company's
portfolio are not deemed to be financial liabilities for the
purposes of this note. Future loan interest is not material and has
also been excluded.
As at 30 June
2013
1 month 1 to 3 3 to 12 1 to
or less months months 5 years >5 years Total
Financial liabilities:
Loan facility - - (3,915,675) - - (3,915,675)
Other payables (182,564) - - - - (182,564)
(182,564) - (3,915,675) - - (4,098,239)
---------- ------------- ------------ --------- --------- -------------
As at 30 June
2012
1 month 1 to 3 3 to 12 1 to
or less months months 5 years >5 years Total
Financial liabilities:
Fair value of - - - - - -
forward currency
contracts
Loan facility - (18,623,654) - - - (18,623,654)
Other payables (222,928) - - - - (222,928)
(222,928) (18,623,654) - - - (18,846,582)
---------- ------------- ------------ --------- --------- -------------
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
20 Financial risk management objectives and policies (continued)
Credit risk
Credit risk is the risk that one party to a financial instrument
will cause a financial loss for the other party by failing to
discharge an obligation.
Credit risk on liquid funds and derivative financial instruments
is limited because the counterparties are banks with high credit
ratings assigned by international credit rating agencies. The
Directors manage this risk by monitoring the credit quality of its
bankers on an ongoing basis. If the credit quality of the bank
deteriorates, the Company would seek to move the short-term
deposits or cash to another bank.
The Company holds cash with Kleinwort Benson (Channel Islands)
Limited which has been assigned a rating of Baa2/Prime-2 by Moody's
Investors Service.
The Company also holds cash with the Sub-Custodian, Wells Fargo,
which has been assigned a rating of A+/A-1+ by Standard &
Poor's ratings agency.
The TLIs in the Company's portfolio, as disclosed on page 32,
have been assigned ratings ranging from A- to A++ by A.M. Best
ratings agency.
Concentration risk
Concentration risk is the risk that the Company's portfolio of
TLIs is not sufficiently diversified within a range of US life
insurance companies.
The Company has invested its assets in a range of TLIs on the
lives of US citizens aged, at the time of acquisition, between 78
and 92 years. All TLIs acquired are Whole-Of-Life policies or
Universal Life policies. No viatical policies (that is, a policy on
the life of an insured who is terminally ill and with a life
expectancy of less than 2 years) have been acquired.
The TLIs acquired are policies issued by a range of US life
insurance companies. Each underlying life insurance company had an
A.M. Best credit rating of at least "A" at the time of acquisition
of the relevant policy; as at 30 June 2013, 94.9% by value of the
TLI portfolio was underwritten by companies whose credit rating is
"A" or better. A.M. Best is a US credit rating agency which
provides the most comprehensive coverage of the US life company
sector. Not more than 15 per cent of the gross assets of the Fund,
at the time of purchase, have been invested in life policies issued
by any single US life insurance company or group.
The Board has overall responsibility for allocating the assets
of the Fund in accordance with the investment objective and policy.
The Investment Manager is responsible, inter alia, for identifying
and monitoring on behalf of the Board, TLIs that are consistent
with the Company's investment objective and policy.
Fair value disclosure
In the opinion of the Directors there is no material difference
between the values presented in the financial statements and the
fair values of the financial assets and liabilities.
ALTERNATIVE ASSET OPPORTUNITIES PCC LIMITED
Notes to the Financial Statements (continued)
For the year ended 30 June 2013
21 Events after the reporting period
Since the year end, the Company has received policy maturity
proceeds of US$7 million, which have been used to repay AIB.
22 Contingent liabilities
Following a ruling issued by the US Internal Revenue Service
("IRS") during 2009 the Board received advice from its US tax
counsel in respect of withholding tax on the proceeds of maturities
that occurred prior to the Company becoming tax resident in the UK.
Based upon this advice, the Directors continue to be of the view
that there would be significant doubt about the merits under US law
of any IRS claim to withholding tax on these proceeds, and they
would challenge any such claim accordingly. As a result, no
provision for any such liability has been made in these financial
statements.
If US withholding tax were to be payable with respect to these
past maturities the Board has estimated that such a liability would
not exceed US$4.7 million (before interest and penalties if
applicable), calculated on the basis that the relevant withholding
tax rate has been 30% since the inception of the Company.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR FSDFMFFDSEDS
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